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OU 160411 >m 

Osmania University Library 

Call No. 33 ~^' a }^>y : Accession No.ffr / 

Title 1 

This book should be returned on or before the date last 
marked below. 





D. K. MALHOTRA M.A., Ph. D. 

New <&. Rei'ised 


First Edition 1939 

Second Edition 2944 

Third Edition 1945 

Fourth Edition 1947 

Fifth Edition 1949 

Copyright Reserved 

Price Rs. 10/8/- 

Ptiftted at Forward Block, Simla attd published 
Minerva Book Shop, Simla, 


The book was first written during 1938-39 with the limit- 
ed objective of providing a clear and concise account of the 
main developments in our currency system during the last 
one hundred years and its first edition came out a few months 
after the outbreak of the war. The war has given rise to 
some very knportant developments in the sphere of Indian 
currency and these have been covered in the present edition. 
The shape of the material incorporated in the first edition has 
also been changed a little by addition, modification and am- 
plification. It is very difficult to write about any aspect of 
Indian war economy without quickly getting out of date. For 
the scene changes even as one is looking at it and the latest 
information has to be pursued like will-o'-the-wisp. 

The following words occurring in the last chapter of the 
previous edition embody the conclusions than reached about 
the future of Indian currency: 

"It may take a long time yet for the international monetary 
position to become clear and stable, with war in the offing it 
may get more confused and unstable- An independent mone- 
tary policy alone can safeguard Indian interests in such an 
emergency. The past record of currency management in this 
country is not such as to inspire public confidence. The ex- 
cessive dependence of her monetary system on currency and 
credit changes in England has been serious disadvantage for 
India. This dependence must be ended and a monetary sys- 
tem suited to Indian needs and managed to promote Indian in- 
terests evolved." 

The war has brought a wealth of experience and wisdom 
but has in no way necessitated the retraction or revision of 
that conclusion. 


This book is modest in its claims and invites no rigorous 

Judgments. But an attempt has been made to import 
into its pages something of a method of approach and spirit to 
which the author attaches great value. If ever there was a 
time when the Indian economist could live in his 'ivory tower' 
and put on the trappings of 'scientific purism* that time is now 
Ipng past. Into the context of every economic problem of 
this our country, the mighty and yet unsolved political pro- 
blem enters and over the whole of its economy it rolls out in 
its wide sweep like a sheet of lead. The Indian economist 
has to show a keener appreciation of this fact. But at the 
same time, he cannot afford to let it grow into an obsession 
which would run away with his analysis and judgment. No- 
thing will, of course, absolve him from the duty of being an 
unbiassed student of events but he will greatly fail if he does 
not endeavour, within the limits of his capacity and work, to 
function as the adviser and prompter of a long suppressed na- 
tion, heavy with the burden of many infructuous decades, but 
now gathering some quite resolve to be on the move, 
10th March, 1944. 


The second edition of the book which came out in April 
1944 was exhausted within a few months. This unexpectedly 

generous response from the readers should have been under 
different conditions a source of the utmost gratification to 
the author but in the event it proved to be a source of some 
embarrassment. For apart from his own preoccupations in 
fields which were not strictly academic, the termination of the 
hostilities first in Europe and later on in Japan and the vaga- 
ries of the control over paper and printing occasioned several 
delays and rendered the task of bringing out the present edi- 
tion not only dilatory but also somewhat arduous. 

The march of events has been very swift all this time and 
as will be evident from the pages of the bookman effort has 


been made to keep pace with it*hough it may not always ha^a 
been very successful Opportunity has been taken to revise 
large portions of the text and to incorporate an account of the 
Bretton Woods Monetary and Financial Conference. Two 
new appendices on the Aftermath of War in India and the 
Decimal System of Coinage have been added. 
5th November, 1945. 

In thijf edition, a few alterations have been made in the text 
and two new chapters on the Aftermath of War and the 
Future of Indian Currency have been added. In an appendix 
the text of the Anglo-American Financial Agreement has also 
been reproduced. It is regretted that some misprints have 
crept into the present edition. 
10 .December, 1946. 


T am indebted to Professor B, M. Bhatia of B * M. College, 
Simla, who has revised the book for this edition and has brought 
it uptodate. A Chapter on Post-wai inflation has been added 
by him while the last chapter has been wholly rewritten. The 
Chapter on "Future of Indian Currency" has been changed into 
the Chapter on "Present debate in Indian Currency". A post 
script has been added on devaluation of sterling. One appendix 
has been deleted. 

Duetto partition the author and the publisher remained 
.displaced for a pretty long time and could not bring out the 
iwrw^&fcfc.^j. earlier. This new edition has also been brought 
out in a hurry to meet the growing demand and it is regretted 
that some misprints have crept into this edition. 

5th November, 1949. D. K. Malhotra 


Introduction ... ... ... ... 1 


A brief outline ... ... ... ""18 


I Period (1835 1893) 

From adoption to abandonment of silver standard 

1. Attempt to introduce gold in circulation ., 20 

2. Fall in the gold price of silver ._ ,. 21 


// Period (18931898) 
A period of Transition ... ... ,,.24 

III Period (1899-1917) 

Evolution, Mechanism and Breakdown of Goldf 
Exchange Standard 

1. Evolution of Gold Exchange Standard .,, 27 

2. Mechanism of Gold Exchange Standard . , . 30 
3. War and Breakdown of Gold Exchange 

Standard ... ... ,.. ... ^ 



IV Period (1917 1920) 


Wartime Regulation of Currency 

1. Government measures to regulate currency 33 

2. A post-war review ... ... 40 


V and VI Periods (19201927) 

Attempt to restore stability and subsequent develop- 

Failure of the Government attempt to 
restore stability ... ... ... 43 

Abandonment of attempt to Maintain 
Stable Exchange ... ... ... 45 

V and VI Periods (1920--1927) (contdj 

The Hilton Young Commission 

1. The recommendations of the Hilton 

Young Commission ... ... ... 48 

2. The problem of the monetary standard 

of India ... ... ... ... 50 

3. The question of a monetary authority ... 59 
4. The ratio question ... ... ... *>1 

5. Government action on the Commission's 

report ... ... ... ... 65 

VII Period (1927 Sept. 1931) 

Adjustment and Strain 

1- Period of Adjustment... ... ... 67 

2 Period of Strain 

3. Ratio in Retrospect ... ... ... M 



VIII Period (Sept. 1931 August 1939) 

Crisis and after 

1. Linking the rupee to sterling ... - '^ 

2. Gold exports ... ... 78 

3. Government's sales of silver ... . 85 

4. The Reserve Bank of India ... .- 87 

5. Prices, Trade, Exchange and Finance ... 94 

6. The ratio controversy... ... *"* 


IX Period (Sept. 1939- August 1945) 
Currency during the Second World War 

1. On the eve of war ... - 116 

2. Rupee-sterling ratio ... - 117 

3. Exchange control ... ... 

4. Currency circulation, public finance and 


Currency circulation volume and velocity 125 
Inflation character and development . . . 131 
War finance-magnitude and methods ... 139 

Some aspects of inflation ... ^2 

Price movements and price control ... 172 

5. Public confidence and the currency 

system ... ... 186 

6. Disposal of sterling ... - 



The International Background 

1. Monetary stability and the economic system 197 

9. The three currency plansAn outline ... 204 

3, International Monetary Fund Scheme ... 217 

4. Bretton Woods Monetary Agreements ... 219 

Post War Period 

1. On the Morrow of War ... ... 233 

2. The International Backgronnd .. ... 234 

3^. Expectations and their Failure ... ... 238 

4. Inflationary Trends ... ... ... 240 

Inflation and the People ... ... 246 

Anti-Inflationary Policy ... ... 247 


Post War Period (Continued) Present Debate in Indian 

1 Disposal of Sterling Balances ... ... 250 

2. Indian's Membership of International 

Monetary Fund and Bank ... ... 257 

3. India and the Empire Dollar Pool ... 260 

4. Par value of Rupee ... ... ... 263 

5. Link with Sterling ... ... ... 264 

6. Currency Policy and Piice Stability 266 

7, Nationalisation of the Reserve Bank ... 269 

8. Decimal System of Coinage ... ... 270 

9. Demonetisation Ordinance ... ... 274 


Devaluation of Sterling and Rupee ... 276 

Appendix A : Automatism and elasticity in Indian 

currency system . ... 279 

Appendix B : Indian Economists 1 Manifestos ... 284 

Appendix C : Dearness allowance, inflation and 

consumers' subsides ... ... 291 

Appendix D : Anglo-American Financial Agreement 297 

Bibliography ... ... ... ... 304 

Index ... ... ..... ... 308 


A general acquaintance with mechanism of foreign 
exchange is necessary to understand properly the history 
and probkihs of Indian currency. The history of Indian 
currency is very largely a history of its fortunes vis a-vis the 
British currency It may not, therefore, be out of place to 
give in the begining of this treatise a general idea of the 
causes underlying fluctuations of exchange between coun- 
tries with different monetary systems. 

The need of exchanging one currency into another 
arises on account of differences in the currencies of a large 
number of countries all over the world. The currency of 
one country is useless as currency when taken out to another 
country. England has its pound, United States of America 
its dollar, France its franc, Russia its rouble, Japan its 
yen, and India its rupee. When payments have to made by 
the government or people of one country to the govern- 
ment or people of another country, one currency must be 
exchanged into another. This raises the important question: 
how much of one currency will be given to get a certain 
quantity of the other ? In other words, how will the rate 
of exchange be determined ? 

To answer this question in a way which will accord 
with the conditions of the actual world, it is necessary to 
consider two different sets of conditions, viz., conditions of 
free competition and conditions of control- Rate of exchange 
is determined in a certain way and by certain forces in a free 
market for foreign exchange and in quite a different way 
and by different directives under conditions of control. 
Conditions of free competition will have to considered at 
some length and may be taken up first. 

Broadly, four cases may be considered to know how the 
rate of exchange is determined under conditions of free 
competition and how far its variations can go. These four 


cases are of : 

(i) Two countries both on metallic standard gold 
standard or silver standard. 

(ii) Two countries, one on gold standard and the 
other on silver standard. 

(Hi) Two countries, one on metallic (gold or silver) 
standard and the other having paper currency not conver- 
tible into gold or silver. 

(iv) Two countries, both having inconvertible paper 

/ Case : Two countries on metallic standard : 

A country is said to be on gold (or silver) standard 
when its unit of account is a gold (or silver) coin freely 
minted by the government, its paper currency is freely con- 
vertible into gold (or silver) coins and free export and 
import of gold (or silver) are allowed. The unit of account 
may also be a certain fixed quantity of gold (or silver) in 
uncoined form. In that case, too, the country is said to be 
on gold (or silver) standard, though more strictly it should 
be said t;o be on gold (or silver) bullion standard. 

Between two countries both of which have gold coins 
as units of account, the rate of exchange will tend to equal 
the ratio between the legally prescribed amounts of gold 
contained in the coins. This ratio is described as the mint 
par of exchange. Before the last Great War, for instance, 
both England and France were on gold standard, the mint 
par of exchange being 25 francs to the pound. The rate of 
exchange that actually comes to prevail in the foreign ex- 
change market is seldom equal to the mint par. It varies in 
response to changes in trade and a few other causes 1 but 

i Among these other causes are movements of capital, speculation, 
apprehension or actual occurrence of political disturbances and changes 
in the rate of interest. 


limits to its variations are set by the cost of transporting 
gold from one country to the other. This requires a little 
explanation. It is obvious that imports into a country 
from another country must ultimately be paid for in the 
currency of the exporting country. Imports into England 
from France, for example, must be paid for by British 
importers in francs. Similarly imports into France from Eng- 
land will have to be eventually paid for in British currency. 
Imports thus create a demand for the currency of the coun- 
try from where they come and exports give a command over 
the supply of the currency of that country to which they 
are sent. The price that people in a country will pay in 
terms of their own currency for the currency of another 
country will depend on the demand for and the supply of 
foreign currency. In other words, the rate of exchange at 
any time will depend upon the relative amount of exports 
and imports. If exports increase, the supply of foreign 
currency at the disposal of the country is extended and its 
price in terms of the currency of the exporting country will 
tend to fall, i. e., a smaller amount of home currency will 
tend to purchase a given amount of it. If, on the other 
hand, imports increase, the demand for foreign currency is 
extended and more in home currency will have to be given 
to purchase a given quantity of it or, in other words, the 
same amount of home currency will tend to purchase less of 
foreign currency. 

The mint par, let it be assumed, is : 

One : 25 Francs. 

If now exports from England increase, one will tend 
to exchange for 26 francs. 

If imports into England increase, one will tend to 
exchange for 24 francs. 

These fluctuations in the rate of exchange due to 
changes in the balance of trade and other causes cannot, 


Exchange of one gold coin into another gold coin will stop 
as soon as it becomes less profitable than a direct shipment 
of gold (contained in the coin) from or to the other country. 
If the cost of sending out gold contained in the coin is less 
than the cost of exchanging the coin for a foreign gold coin, 
export of gold will be preferred to exchange of currency in 
the foreign exchange market. The rate of exchange cannot 
thus rise above or fall below certain points. As soon as 
these points are reached, people find export or import of 
gold cheaper than purchase or sale of foreign currency. 
These points are called gold points and are found by adding 
to and deducting from the mint par the cost of transport of 

It only remains to add that foreign currency is bought 
and sold through banks (which collectively make up the 
foreign exchange market) and the media used for the pur- 
pose are bills of exchange which are simply orders to pay 
specified amounts of currency of a country. 

An example to bring out the meaning of gold points :- 

Upper gold point 
Mint par : one =25 francs 

If exports from England increase, 1 will tend to ex- 
change for more than 25 francs. 

Cost of transport of gold containd in a is, let us 
say, 1/4 franc. 

As soon as the rate of exchange in the market rises 
above 1=25J francs, a British exporter will find it cheaper 
to get gold direct from France. He will receive minus cost 
of transport more than 25 francs which are equivalent to 
more than a (Mint par : 1=25 francs). No exporter will, 
therefore, receive less than one pound for every 25J francs 
from a bank- This is the upper gold point. The rate of 
exchange cannot rise higher than this, for an import of gold 
into England will be induced. 


Lower gold point 
Mint par : one ==25 francs 

If imports into England increase, 1 will tend to ex- 
change for less than 25 francs. 

Cost of transport of gold in a =} franc. 

As soon as the rate of exchange in the market falls 
below 1 =241 francs, a Britsh importer will find it cheaper 
to export gold containd in a pound than to get francs 
through the bank. By exporting gold directly he can remit, 
after paying cost of transport, 24| francs. The rate of ex- 
change cannot, therefore, fall below this point. This is the 
lower gold point. A fall below this point will l$ad to 
export of gold. 

The rate of exchange will, therefore, fluctuate between 
24| and 25J francs to the . 

Fluctuations of exchange and limits to them between 
two countries on silver standard are determined in the same 

II Case: Two countries one on gold standard and the 
other on silver standard. 

In this case there is no mint par as such. The ratio 
between the metallic contents of the two currencies is vari- 
able, depending on the price of silver in terms of gold. 
The rate of exchange, therefore, depends on three factors: 
CO the volume of exports and imports, (it) gold price of 
silver, and Cm) cost of transport of gold or silver from one 
country to the other. The value ratio between silver and 
gold from the middle of the seventeenth century and 
throughout the eighteenth varied between 13| : I and 15J : 1 
but after 1870 this ratio was disturbed. 1 

1 Knut Wicksell: Lectures on Political Economy, Vol. II, p 36. 


A very good illustration of the determination of rate 
of exchange between a gold standard and a silver standard 
country is provided by the currency relationships of India 
and England during the nineteenth century. From 1835 to 
1893 India was on silver standard and England on gold 
standard. In 1871-72 when the price of silver was60|rf. per 
ounce, the Indian rupee was equivalent to a little less than 
25. After 1873, the price of silver in terms of gold fell. 
Natuarlly the price of silver in the rupee in terms of gold 
in the pound also fell. In 1893, when gold price of silver was 
39d. per ounce, the Indian rupee became equivalent' to only 
Is. 3d. During the same period fluctuations of exchange 
took place in response to changes in the balance of trade 
also within the limits set by cost of transport of gold or 
silver from one country to the other. 

/// Case and IV Case : Two countries one of which 
or both which are on inconvertible paper standard. 

These two cases may be considered together because 
they bear the same explanation. In these cases, there is no 
mint par as such and the question of cost of transport of 
metal from one country to the other does not aries because 
in one or both of the countries the currency is not conver- 
tible into bullion or coin. 

Here the rate of exchange between the countries tends 
to equal the ratio between the purchasing power of the 
currencies, of the two countries. If, for Instance, one 
paper pound has the same purchasing powef against commo- 
dities as five paper dollars, the rate of exchange will 
oscillate about the parity : 1 : $ 5. Exchange fluctuations 
will no doubt take place in response to changes in the 
balance of trade and our causes but will centre round this 
purchasing power parity. 

During the last Great War many countries went off 
metallic standards and inflated their paper currencies. The 


old way of explaining fluctuations in the rate of exchange 
became utterly inadequate. A new explanation was 
necessary and this was provided by Prof. Gustav Cassel, the 
Swedish economist who propounded the now famous theory 
of Purchasing Power Parity. The essence of the theory is 
that exchange rates reflect the relation between the internal 
purchasing powers of the currency units of different coun- 
tries. Confusion and misunderstanding have, however,been 
caused by this very simple statement of the theory and it 
has become necessary to distinguish between, what are dis- 
cribed as, its positive and comparative forms. In its posi- 
tive form, the theory states that the ratio of purchasing 
powers of two currencies furnishes the equilibrium or 
normal rate of exchange round which the actual market rate 
fluctuates. It was in this form that the theory was first 
expounded by Cassel but as it was found open to a number 
of objections by the critics, a different mode of its exposition 
was emphasized by the author. In its comparative form, the 
theory asserts that if an equilibrium rate of exchange has 
already been established between two countries and a cha- 
nge occurs in the purchasing powers of their currencies, 
than the new equilibrium or normal rate of exchange can be 
found by multiplying the old by the ratio of the change in 
the purchasing powers of the two currencies. In Cassel's 
own words : 

4 'Our willingness to pay a certain price for foreign 
money must ultimately and assentially be due to the fact 
that this money possesses a purchasing power against 
commodities and services in that foreign country. On the 
other hand, when we offer so and so much of our money, 
we are actually offering a purchasing power as against 
commodities and services in our own country. Our valu- 
ation of a foreign currency in terms of our own, therefore, 
mainly depends on the relative purchasing power of the 
two correncies in their respective countries When two 


currencies have undergone inflation, the normal 
rate of exchange will be equal to the old rate multi- 
plied by the quotient of the degree of inflation in the one 
country and in the other. There will naturally always be 
found deviations from this new normal rate and during the 
transition period these deviations may be expected to be 
fairly wide. But the rate that has^ been calculated by the 
above method must be regarded as the new parity between 
the currencies, the point of balance towards which, in spite 
of all temporary fluctuations, the exchange will always tend- 
This parity I call purchasing power parity". 1 

The usual, though not always a satisfactory, method 
of measuring the purchasing powers of/currencies is the use 
of index numbers of prices. Changes in the general level 
of prices furnish the changes in the purchasing power of 
currencies. The example given below will give an idea 
of the purport of the purchasing power parity theory as 
also a rough method of calculating the parity, 

Mint par or the old equilibrium rate : 

Year England France 

1913 1 = 25 Francs 

Index 7\[os. of prices 

England France 

1913 100 100 

1920 300 500 

Purchasing power parity or the new equilibrium rate: 

=25xfgg francs 
or =41*7 fanes. 

The figures taken here are true td facts to a small ex- 
tent and the parity thus worked out also accords to some 
extent with the actual rate in January 1920. 

Into the refinements and criticims of the theory it is 
needless to enter here. The theory has been accepted in 
tassel : Mone} and Foreign Exchange after 1914, pp. 138-40. 


essentials and used to explain the normal rates of exchange 
and exchange fluctuations not only of inconvertible paper 
currencies but of currencies based on metallic standards 
as well. The mint par of exchange may in fact be consid- 
ered just as much a ratio of the purchasing powers of the 
metallic contents of the currency units as a ratio of the met- 
allic contents themselves. The parity of purchasing power 
is thus a wide parity and includes mint par of exchange. 

Normal rate, Overvaluation, Undervaluation, Devaluation, 

Terms like overvaluation and undervaluation are so 
much a part of the jargon of the currency expert that it is 
impossible to follow any serious discussion on currency 
matters without knowing their meaning. They describe as 
indeed the prefixes de-and under - indicate an abnormal 
valuation of currency. To know thier meaning, therefore, 
one must ascertain what constitutes the normal valuation of 
the currency unit of a country. It is not easy to give a short 
and precise definition of the normal exchange value of curr- 
ency or the normal rate of exchange. Far less easy is it to 
state exactly what the normal rate of exchange is under 
given conditions. In a general way, the normal rate of ex- 
change may be defined as one which prevails in, and brings 
about, conditions of equilibrium in the balance of payments 
and of general economic stability. This rate imposes no strain 
either on the balance of payments or on export industries; 
causes, consequently, no continuous outflow or inflow of 
gold; subjects the internal economy of a country to no undue 
stress and reflects the basic economic relations, including 
the relations of price levels, of one country and another. It 
follows that any other rate will give rise to a series of dis- 
turbances, maladjustments and disharmonies. As a matter 
of fact, the normal rate can be picked out more by the 
absence of such unfavourable reactions than by any formal 
definition of its own* & 



But the more important, because more practical, 
question is one of finding out the normal rate at a given 
point of time As a good approximation it may be said that 
the purchasing power parity constitutes the normal or 
equilibrium rate; that is to say, a rate at which the 
purchasing power of currency unit at home is equal to its 
purchasing power abroad (on its conversion into foreign 
currency) is the normal rate- At this rate, the currency is 
neither overvalued nor undervalued- If the rate of ex- 
change is higher than the normal rate so that the currency 
unit purchases more abroad than at home, the currency is 
said to be overvalued. An overvalued currency depresses 
exports and export industries, stimulates imports and upsets 
the balance of payments, causes export of capital and gives 
rise to drain of gold. The British pound between 1925 and 
1931 provides a good example of an overvalued currency. 
A currency is said to be in a state of undervaluation if it 
purchases less abroad (on conversion into foreign currency) 
than it does at home- An undervalued currency handicaps 
imports and encourages exports and stimulates an inflow of 
gold. The French franc was, at the parity chosen for it in 
1928, considerably undervalued. 

When a currency is overvalued, i-e^ when its external 
purchasing powar is higher than its internal purchasing 
power, it can be brought back to its normal valuation in 
either of two ways: either its external purchasing power can 
be lowered or its internal purchasing power raised. Deval- 
uation is the term used for the first alternative and may be 
defined as a reduction in the quantum of gold or foreign 
currency into which the currency unit is exchanged in the 
foreign exchange market. The second alternative is de- 
flation which may be defined, in this context, as a contrac- 
tion of the quantity of currency in circulation with a view 
to raising the purchasing power of the currency unit. Such 
contraction leads to a fall in prices and a$ certain items in 


cost of production, such as wages, may not fall to the same 
extent as prices, it may pare off profits and considerably 
discourage trade and enterprise. From the standpoint of 
the requirements of internal economy, therefore, a country 
will usually prefer devaluation to deflation. Considerations 
of international prestige and international economic 
relations may, however, dicate the other but less attractive 
course of deflation It is necessary to mention here that 
devaluation may be resorted to not only to cure the dis- 
advantageous state of overvaluation but also bring about the 
advantageous state of undervaluation- 

The term 'devaluation* is often used interchangeably 
for *depreciation 1 but devaluation implies a delibrate and 
definite reduction in value while depreciation means simply 
a fall in value which may not necessarily be deliberate and 
is generally not definite and predetermined. 

Exchange control : 

At this stage it is necessary to turn from conditions of 
free competition and the concepts relevant thereto to a 
brief treatment of conditions of control. 

The foreign exchange market in which currencies 
acquire their value from the interplay of the forces of 
demand and supply functions more or less freely in normal 
times. In times of disturbance or crisis, however, it is 
controlled or superseded by the monetary authority of the 
country which may be the government, the central bank 
or a special organisation created for the purpose. 
Exchange control is the compendious term covering all 
those measures of control which involve abnormal inter- 
vention by the monetary authority in the foreign exchange 
market . It aims at changing directly the demand or supply 
on the foreign exchange market and thus marks a departure 
from the conditions of free competition. 


The chief aim of exchange control is, of course, to 
make the rate of exchange different from what it would be 
in a free exchange market. This aim obviously implies that 
the monetary authority is not satisfied with the rate deter- 
mined by forces of demand and supply and wants a 
different rate to prevail. This control rate may be higher 
or lower than the rate of the uncontrolled market or it 
may be just a very much stabilished rate free from the 
fluctuations of a free market- 

Exchange control is a product of unsettled times such as 
war, political upheaval or currency disturbance and is 
relaxed or removed with the return of normal conditions. 
It was adopted in most countries during the last war, was 
gradually relaxed' and removed between 1926 and 1931 
but was re-adopted in many countries after the currency 
crisis of 1931- With the outbreak of the present war it was 
introduced in countries where it did not already exist and 
was intensified in others. It would be wholly unrealistic 
now to speak of a free market in foreign exchange. 

Inflation, Deflation, Reflation: 

The three terms above do not refer to the state of the 
foreign exchange market but to the condition of currency 
within a country. A brief explanation of them is being 
given here for two reasons : firstly, the state of home 
currency has a direct bearing on its valuation in terms of 
foreign currencies and secondly, the last war has impinged 
on, and altered the state of, almost all the currencies of 
the world. From the standpoint of war economy and also 
of post-war monetary reconstruction a clear understanding 
of the significance of these terms is advisable. 

Inflation is one of those economic terms which cannot 
be precisely defined and some well-known writers on money 
have either confessedly left some 'mistiness' about it or not 


attempted to define it with scientific precision, 1 The 
general idea conveyed by the term is, however, happily not 
very much at variance with its common definition; it 
signifies an excess or superfluity of media of exchange, 
including notes and bank credit. And when this much has 
been agreed upon, further discsusion can only turn on what 
constitutes 'excess' or 'superfluity 1 and how and when such 
excess may manifest itself. It is here necessary not to forget 
that the total effective supply of money or currency in any 
country is the combined result of its quantity ^nd its 
velocity of circulation. This effective total supply is used for 
meeting the requirments of economic activity and from this 
interaction of money-supply and money-work, there results 
a certain general level of prices. It is diffcult to say what, 
relationship between money-supply and economic activity 8 
is the optimum or the best and how it can to identified (if 
it ever exists) but some such optimum relationship will 
have to be visualised in order to hit upon even a tolerably 
ood definition of inflation. 

Assuming, therefore, that equilibrium between money- 
supply and economic activity has been established and a 
desirable level of prices prevails, if nowthiseq uilibrium is 
disturbed by an expansion of the total effective supply of 
money, inflation will be said to have occured. An invitable 
outcome of a larger supply of money acting upon an unchan- 
ged quantum of economic activity will be a rise in prices 
which is the most important manifestation of inflation. It 
is, however, possible that the equilibrium relationship bet- 
ween money-supply and economic activity may be disturbed 
not from the money side but from the commodity-side, that 

1 Pigou in Economics in Practice, p.85 and L. Von Mises in Theory of 
Money and Credit, p, 240 

2 The term 'economic activity', used here in a comprehensi\e sense 
to cover production, trade, employment etc., appears to be more suitable 
than the alternative terms sometimes employed, such as, production, 
real income, real values, etc. 


is to say, the requirements of the economic system for money 
may shrink but the supply of money may remain the same. In 
this case also, inflation will occur and prices rise, not by the 
active act of increasing money-supply but through the 
passive act of letting it remain as it was. 

It is further necessary to note that though a large and 
continuous general rise in prices is an important sydiptom of 
inflation, a rise in prices need not always indicate presence 
of inflation just as a stable level of prices need not necess- 
arily indicate absence of it. Prices in a country may rise 
because of the scarcity of many important commodities 
(caused, for instance, by failure of harvests) or because of 
the rise in world price level. Again, prices may be heading 
downward because of rapidly increasing prouctivity but the 
monetary authority of a country may, by puting increasing 
quantities of money in circulation, endeavour to maintain 
them at their old level. There would be no inflation in rhe 
former case but there would be one in the latter. The state 
of price level does not, in other words, furnish an unfailing 
clue to the presence of inflation; it is necessary to go further 
and enquire why the price level is changing as it does. A 
large and continuous rise in prices is, however, such an un- 
common phenomenon that it may safely be taken to furnish 
a fairly strong evidence of inflation. 

It is necessary now to know why the equilibrium 
relation-ship of money-supply and economic activity should 
be disturbed at all. Normally, it may be said, there will be 
a tendency for such relationship to be established by the 
constant endeavour of the monetary authority of a country 
to adjust the money-supply to the need for it. It must, 
therefore, be an execptipnal circumstance or emergency 
which hampers this process of adjustment and creates a 
maladjustment. Inflation, as a rule, occurs when a govern- 
ment, unable to meet its expenditure by the usual methods 


of levying taxes and raising loans, resorts to means which 
involve substantial additions to the total money-supply not 
offset by any corresponding need for them. These means 
may be either the direct one of printing currency notes and 
using them for making the requisite purchases or the 
indirect one of borrowing from the central bank against 
securities and thus bringing about an expansion of the more 
widely used medium of exchange, viz., bank credit. Infla- 
tion brought about by means of the former kind is often 
called currency or fiat money or paper-money inflation and 
that resulting from means of the latter type is generally 
described as banking or credit inflation. 1 

Inflation is thus, to begin with, an easy and more or 
less inexpensive device for meeting an emergency which 
imposes a heavy strain on government finance. But if the 
emergency lasts, it gradually gathers momentum. For,, as 
prices rise, the government has to 'bring forth a rapidly 
swelling volume of fresh purchasing power to obtain a steady 
command over goods and services. This accentuates the 
rise in prices further. Goods and services'thus become pro- 
gressively dearer in terms of money or, what is the same 
thing, money becomes progressively cheaper in terms of 
goods and services. In the later stages of this vicious process 
prices begin to rise more than in proportion to the increase 
in the quantity of money in circulation because of the 
increased velocity of turnover of means of payment. 
This process cannot continue ad libitum ; for no 
one would wish to keep his assets in a currency 
that is fast losing in value and a time may come when no 

an elaboration of this definition of inflation Public Finance 
by A. de Viti de Marco, p. 403n. ; also articles by Pigou in Economic 
Journal for the years 1918 and 1940. Anatol Murad's essay on 'Inflation 
in Current Economic Literature* included in Parker and Wills' -Economics 
of Inflation is helpful ; so is American Research Institue's What will 
inflation and devaluation mean to you, 1941. 


one would care to accept it at all. 1 This 'flight from 
currency' has its counterpart in the hoarding of commodities 
particularly precious metals, jewellery, works of art and 
investment in dependable foreign currencies. The flight 
is complete when the currency is no longer acceptable and 
a substitute is found for it. This culmination marks the 
crash of the currency system and the finale of inflation. 
An odious feature of inflation is the uneven rise in the 
money incomes of the different sections of the community; 
the fresh supplies of means of payment injected into the 
economic system find their way into some ciorners and 
crevices in greater profusion than in others- The resultant 
rise in prices affects most adversely the persons with small 
or fixed incomes while for the traders, manufacturers and 
speculators, it creates a spell of illusory prosperity. Infla- 
tion is, in effect, a measure of taxation, transferring to the 
government command over real resources but it is ex- 
tremly indiscriminate, haphazard and inequitable in effects, 
inasmuch as it places the heaviest burden on the weakest 
shoulders and effects arbitary redistribution of wealth, 
Deflation is, broadly speaking, the opposite of inflation 
and may be defined as a contraction in the total effective 
supply of money which is not offset by a corresponding 
diminution in the demand for money. Such contraction 
leads to a fall in the general level of prices, that is to a rise 
in the value of money. Usually deflation is practised with 
the object of dealing with the excesses of aftermath of an 
irfflation. The motive behind it is the raising of the value 

1 During the German inflation of 1920-23 the classical example 
prices and banknote circulation touched staggeiing figures. The incre- 
ase in note circulation proceeded at such a late that "in the last months 
belore the collapse, more than 300 paper mills worked at top speed to 
deliver note paper to the Reirhsbank and 150 printing companies had 
2,000 note presses running day and night to print the Reichsbank notes... 
Prices rose daily, almost hourly Money in the purse burned like fire 
and everyone thought only how to get rid of it at the earliest opportunity 
See Stopler ; German Economy, 2870-1940: pp. 152-55. 


of currency to its previous level, in terms of gold or in terms 
of other currencies. 

Reflation is the term used for that specific and limited 
kind of expansion of currency which aims at raising prices 
from a lower level which is considered unsatisfactory to a 
higher level. Such an expansion is advocated in times of 
depression when a large fall in prices has wiped out the 
margin of profit and reduced business and enterprise to a 
stagnant state- Pumping money into circulation 'priming 
the pump,* as it is called by judicious means is considered, 
under such conditions, a wholesome stimulant for industry 
and enterprise. But a policy of reflation is beset with the 
risk of gradually lengthening out into one of inflation. 



The history of Indian currency can be divided into 
more or less defined periods. It may be taken to date from 
1835 the year in which the rupee was established as the 
standard coin throughout the territories of the East India 
Company. The following periods may be marked : 

I Period: 18351893, during which India was on silver 
standard. This period may further be split up into two periods 
(a) 18351874, during which efforts made to secure gold 
currency for the country proved abortive and (fc) 1874 1893 
during which the gold price of silver fell and led eventually 
to the suspension of silver standard. 

II Period : 18931898 : A period of transition which 
was to precede introduction of gold standard with gold 

III Period: 1899 August, 1917: A period during 
which the Government set out to establish gold standard 
but drifted on to gold exchange standard. 

IV Period : August, 19171920 : A period of unsta- 
ble exchange during which the Government took measures 
to regulate currency. 

V Period : February 1920 September 1920 : A short 
period during which the Government tried unsuccessfully to 
restore stable gold exchange standard by holding the 
exchange at 2s. (gold) and involved Indian exchequer in 
a huge loss. 

VI Period : 192027 : A period during which the Govern- 
ment gave up attempts to maintain a particular exchange 
rate, but not those to secure a particular exchange rate. 

VII Period : 1927 SeptenHer, 1931 : A period dur- 
ing which gold exchange standard (actually sterling exchange 


standard) was restored and efforts continuously made to 
maintain the rate at Is. d. 

VIII Period : September 1931 August 1939: A period 
of crisis and uncertainty which began with rupee being 
linked to sterling and during which the Indian currency 
system weathered the economic storm. 

IX Period : September 1939 August 1945 : Six years 
of the war during which the Indian currency system 
underwent some unprecedented and startling changes 
and during which the monetary authorities, led by the 
necessities of war, imposed various controls over currency 
and exchange. 

X Period : September 1945 : The period of the post- 
war aftermath during which adjustments required by the 
post-war conditions were hurriedly made. 

It would be helpful to know that running like two 
threads through the history of Indian currency are the desire 
of Indian people to have a gold standard and the anxiety 
of the Government to maintain a stable exchange rate at 
all costs- The recent war has thrown the monetary systems 
of the world into the melting pot- From the discussions 
and decisions of the United Nations Financial and Mone- 
tary Conference held at Bretton Woods in July 1944 is 
steadily emerging a new pattern of international monetary 


7 Period : 28351893 


Attempts by the East India Company to reform Indian 
currency had begun much before 1835 and the silver rupee 
weighing 180 grains (ll/12th fine) was made the standard 
coin in Madras in 1818 and in Bombay in 1823. 1 In 1835 
(by the Act No. XVII) the silver rupee of 180 grains (ll/12th* 

1 Reform was needed because of the large variety of coins of gold 
and silver circulating in different parts of the currency, 994 coins of 
varying weight and fineness are said to have been circulating about this 


fine) was made the standard coin throughout British 
India- 1 Mints were opened to the free coinage of silver. 
The face value of the rupee was equal to its intrinsic value, 
i.e., the value of the rupee against gold or commodities was 
equal to the value of silver contained in the rupee. It must 
be obvious that coinage being free to public it was not possi- 
ble for the Government to make the rupee circulate at a 
value higher than that of silver put in the rupee. 



By the Act of 1835, which made the silver rupee 
standard coin, gold coins were deprived of their legal tender 
quality, i.e., legally they could not be paid and accepted. 
The Act permitted, however, the coinage of gold mohars 
if required by the public. These mohars were to be equal 
in value to 5, 10, 15 or 30 rupees. It is difficult to under- 
stand why the gold coins struck under the Act were not to 
be legal tender. A proclamation issued in 1841 authorised 
receipt of gold coins at public treasuries in payment of 
public dues at their face value unless they had passed a 
certain limit of lightness when they were to be taken as 
bullion only, by weight. The rate at which gold coins were 
to be received was 15 : 1. Some encouragement was thus 
given to gold currency but it was to be very brief. Gold 
discoveries in California and Australia from 1848 to 1851 
made it cheaper for the people to pay in gold rather than 
silver at the rate of 15 : 1- Gold began to flow to the treas- 
uries in large quantities and the Government lost by 
accepting it at a rate higher than the market rate. From 
1st January, 1853, therefore, receiving of gold coins in 
payments of public dues was stopped. Gold, however, 
continued to be received into the mint for coinage under 
the Act of 1835. 

Mansfield Commission, 1866 

Proposals were made after 1853 to introduce gold 
1 The weight and fineness of the rupee remained unaltered 

imfn 1Q4n . 


currency in India. Several Chambers of Commerce and Sir 
Charles Trevelyan (in his Minute of 2Qth June, 1864) 
pressed for the introduction of gold coins in India and the 
Government of India agreed to receive and pay, when con- 
venient, sovereigns, and half-sovereigns minted at any 
authorised mint in England or Australia at the rate of Rs. 10 
and Rs. 5 respectively. The gold coins were not to be legal 
tender, however. At these rates gold coins were not tend- 
ered at the treasuries, A Commission was appointed in 1866 
under the chairmanship of Sir William Mansfield to report 
on the best way of meeting the currency demands of the 
country. It made the following recommendations : 

(0 gold coins of 15, 10 and 5 rupees should be issued. 

() currency should consist of gold, silver and paper- 1 

(iif) the possibility of issuing a universal note should be 
considered. 2 

Nothing resulted from these recommendations. In 
1868, the rate for sovereigns and half-sovereigns was raised 
to Rs. 10-4 and Rs. 5-2 respectively to attract gold to the 
treasuries. Shortly after this the gold price of silver began 
to fall and in May 1875, the Governor- General-in-Council 
expressed his unwillingness to take any step to recognize 
gold as the standard of value in India. 


From 1874 onwards the gold price of silver began to 
fall- From 60|d. per ounce in 1871-72 it fell to 39d. in 
1892-93. From 1873 to 1893, the fall amounted to 40 per cent. 
As the silver rupee was a freely minted coin, the value of 

i Currency notes had been issued and made full legal tender within 
their respective circle of issue by the Paper Currency Act of 1861. The 
Commission were to report on the working of this Act also. 

8 To anticipate things a little, it may be mentioned here that five 
rupee note was made universal legal tender in 1909, ten and fifty rupee 
notes in 1910 and hundred rupee note in 1911. .Five hundred and one 
thousand rupee notes were made universal legal tender in 1931. 


silver in the rupee in terms of gold also began to fall and 
the rate of exchange fell from 1*. llfci. to 1*. 3d. in 1892-93. 
There were two kinds of causes accounting for the fall in 
the gold price of silver : 

(a) Depreciation (fall in value) of silver due to increased 
production of silver and demonetization of silver by several 
countries such as Germany, Sweden, Denmark, Norway, etc- 

(fc) Appreciation (rise in value) of gold owing to its 
decreased production and increased demand from countries 
adopting gold standard such as Germany and Scandinavian 

For a long time the Government took no action and 
waited for the introduction of international bimetallism. The 
last of the International Monetary Conferences held at 
Brussels in 1892 adjourned without arriving at any agreement. 
The difficulties of the Government and people had in the 
meantime become acute owing to the following reasons : 

(i) To meet their Home Charges (i.e., expenditure in 
England) they had to remit a larger number of rupees and 
this necessitated increased taxation. 

(ii) Fluctuations of exchange introduced uncertainty so 
harmful to trade. It is sometimes said that a falling ex- 
change stimulates exports but there was evidence to show 
that the progress of export trade was less with a rapidly 
falling than with a steady exchange. 1 

(in) The European officials who made remittances 
abroad claimed compensation for the loss they suffered due 
to a fall in exchange- The prices in England had no doubt 
fallen at that time but even allowing for that the amount of 
sterling which the same number of rupees procured had 
been largely reduced. 

(iv) A falling exchange greatly checked the investment 
of British capital in India because there was uncertainty as 
to the interest received from such investment and the 
reduction that the principal sum may sufter when it was 
transferred to England at a lower rate. 

1 Prnrt rvf HorfirVipIl Committee M8Q^ nnra 97 


(i>) A falling exchange, involving as it did smaller 
remittances for the same number of rupees, made it more 
difficult to arrange for the services of European employees 
to carry on industrial undertakings in India- 

The Herschell Committee ,189 2 

In 1892, a committee was appointed under the chair- 
manship of Lord Herschell to consider if it was expedient 
to close the mints to the free coinage of silver with a view 
to the introduction of gold standard, as was suggested by 
the Government of India. The object of closing the mints 
to the free coinage of silver was to secure control over 
the supply of rupees and thus prevent a fall in the exchange 
value of the rupee. The Herschell Committee recom- 
mended that : 

(0 Mints should be closed to the free coinage of Jx>th 
silver and gold/ 1 but the Government should retain the 
liberty to coin rupees if required by the public in exchange 
for gold received in Government treasuries at the rate of 
Is. 4d. : Re. 

() The rupee must remain full legal tender. 

Regarding the introduction of gold coins in India, the 
Committee did not attach any importance to the objection 
that Indian people were not used to them. "Gold", they 
said, " has never been entirely out of use in India " and, 
in any case, the ordinary currency in India would still be 
silver or paper though based on gold. Moreover, if gold 
coinage were introduced on proper basis, much of the un- 
coined gold in India would be brought to the mints. 2 

By Act No. VIII 1893, mints were closed to the free 
coinage of silver, though the Government retained the 
power to coin rupees on their own account. Three notifi- 
cations (Nos. 2662-64) were also issued making arrange- 
ments for (a) the receipt of gold at the mints at the rate 
of 7*53344 grains of fine gold per rupee or 16d. : Re. 3 

1 This deserves notice because the Act of 1835 and the Indian 
Coinage Act of 1870 permitted coinage of gold for the public though 
gold was not legal tender. The Act of 1893, stopped even the coinage 
of gold. 

2 Report of the Herschell Committee, 1893, paras 99-103. 

3 This notification was later on withdrawn in 1906,. 


(6) receipt of sovereigns and half-sovereigns in payment of 
public dues at 16d . : Re- and (c) issue of currency notes to 
the Controller General in exchange for British gold or 
gold bullion. 1 The aim of the Act and the notifications 
was to raise the gold value of the rupee to Is. 4d. by 
restricting its supply, make it effective at that rate and 
then to introduce gold standard. 1 

It may be of some interest to note that the total 
coinage of rupees during the currency of silver standard 
in India from 1835 to 1893 amounted to 335 crores of 

rupees. 8 


II Penod : 1 893-1 898 

In a telegram of the 22nd January 1893, the Govern- 
ment of India had said : '* We think that an interval of time, 
the length of which cannot be determined beforehand, 
should elapse between closure of the mints and any 
attempt to coin gold here." During this interval which ex- 
tended from 1893 to 1898, the exchange value of the jrupee 
fell in the beginning so low as Is. Id. in 1894 4 but recovered 
later and was 15*9d. in 1898. The Government of India 

1 This notification was supplemented by the Paper Currency Act 
of 1910 which provided for issue of notes against British gold coin. 

2 Lords T. H. Farrer and R, E. Welby, two members of the 
Herschell Committee, had pointed out in a sepaiate note that if gold 
does not flow into Government reserve against paper issue automatically, 
'* a reserve (of gold) should be provided before the Indian Government 
takes the final step of announcing gold as the standard, coupled with 
the correlative obligation to give gold tor silver." Report, p. 56. 

3 Report of the Head Commissioner of Paper Currency, Calcutta, 
for the year 1896-97, p. 19. 

4 This was due to suspension of silver purchases by America 
and an apptehension about a fall in the value of silver rupees which 
were, therefore, brought out of hoards to be disposed of before further 
tail occurred. 


now made proposals to end the period of transition and to 
take ** active steps to secure the early establishment of a 
gold standard and a stable exchange/' These proposals 
were (i) to raise the rate to 16d- (it was then a little less) 
by withdrawing some rupees from circulation and melting 
them, (n) to raise a loan in England and to remit part of it 
to India in sovereigns to serve as gold reserve against note- 
issue, (Hi) to sell silver bullion obtained from melted rupees 
and add gold to the reserve and (iv) to part with gold only 
after the rate had been established .at I6d. 
The Fowler Committee, 2898 

In 1898, a Committee was appointed presided over by 
Sir Henry Fowler to consider these proposals for making 
effective the policy initiated in 1893. The Committee had 
also to suggest ways of securing a satisfactory system of 
currency and stable exchange- 

The Committee had before them three broad alterna- 
tives : (?) re-opening the mints to the free coinage of silver 
.e., reversion to silver standard, (ii) continuance of the 
existing arrangements and (Hi) the introduction of gold 
standard, with or without gold currency. The Committee 
was against reverting to silver standard because it would 
result in renewed instability of exchanges between India and 
gold standard countries, hamper international trade and 
revive the difficulties that the Government of India had to 
face in meeting their obligations in England. They were 
also against allowing the status quo to continue because it 
would cause additional uncertainty and raise doubts as to 
the ultimate success of gold standard in India. 

The Committee, therefore came to the conclusion 
that the government should proceed with measures for the 
effective establishment of a gold standard. Among the 
three different schemes of gold standard placed before the 
Committee, those of Mr. Lesley Probyn and Mr. A. M. 
Lindsay provided for gold standard without gold currency 
while the Government of India's scheme favoured gold stan- 


dard with gold currency. The Committee rejected the first 
two schemes and made the following recommendations : 

(f) The British sovereign should be made a legal 
tender and a current coin in India- Indian mints should be 
thrown open to the unrestricted coinage of gold on such 
terms and conditions as govern the three Australian bran- 
ches of the Royal Mint. 

'* (if) The rate of exchange should be made stable at 
Is. 4d. : Re. 

(Hi) Rupees should remain unlimited legal tender. 

(iv) The Government should continue to give rupees 
for gold but fresh rupees should not be coined until the pro- 
portion of gold in the currency is found to exceed the 
requirements of the public. 

(v) Any profits on the coinage of rupees should be 
accumulated in a special reserve fund. 

(vf) No legal obligation should be imposed on the 
Government to give gold for rupees ; for this would make 
the Government liable to find gold at a moment's notice in 
undefined amounts. 

(vif) The Government should make gold available for 
export if exchange shows a tendency to fall below the specie 

In two respects the currency system recommended by 
the Committee differed from the ordinary gold standard. 
In the first place, though gold coins were to be freely min- 
ted and were to be full legal tender, there was to be no 
legal obligation on the Government to convert rupees into 
gold. Secondly, the rupees, quite unlike subsidiary coins 
under gold standard, were to remain full legal tender. The 
Committee, it is clear, looked forward to the ultimate estab- 
lishment of gold standard with gold currency and had 
meanwhile recommended for adoption a close approxima- 
tion of it- 

l Cf ., however, " It is sometimes erroneously believed that the 

proper position of a rupee under a gold standard is not to be unlimited 
legal tender." L. C. Jain Monetary Problems of India, p'29. The ques- 
tion was discussed by the Fowler Committee,vide Report, paras. 56-59. 


III Period : 1899 August 1917 



The effective establishment of gold standard was the 
paramount object which the Fowler Committee set before 
the Indian authorities. The Government of India decided 
to take action on the recommendations of the Committee. 
The Indian Act No. XXII of 1899 made the sovereign and 
half-sovereign legal tender throughout India at Rs. 15 : f 
(Is. 4d- : Re.). Active steps were taken to open a mint for 
the coinage of gold in India but the scheme was dropped 
after nearing completion in 1902. A reserve, called the 
Gold Reserve, was created to set apart the profits on the 
coinage of rupees. An active effort was made to induce the 
people to use sovereigns as a medium of exchange and cur- 
rency offices, post offices and government institutions were 
instructed to pay out sovereigns to the public. The results 
were unsatisfactory and a large number of gold coins were 
returned to the Government treasuries. In many places 
sovereigns went to a discount of as much as 4 annas. At the 
same time there was such a large demand for rupees that the 
Government was compelled to resume the coinage of rupees 
early in 1900 1 . The profits on the coinage were credited to the 
Gold Reserve. After 1900 the experiment of putting gold 
coins into circulation was not repeated. Apparently it was 
concluded by the Government that people did not want gold 
coins. The conclusion was wrong because both the time 
and manner of putting gold coins into circulation were ill- 

1 From 1894 to 1897 there had been no coinage of rupees; from 1897 
to 1899 no new rupees were coined: coinage was on a small scale and \vas 
done mostly on account of some Indian States adopting British rupees in 
place of their own silver coin. There was a phenomenal coinage in 1900- 
1901 of a little over Rs. 17crores and " the Currency Department was 
hardly able to comply with the demand/' (vide Report of th* Head 
Commissioner of Paper Currency, 1896-97 to 1903-04). 


chosen. Famine conditions prevailed about this time and 
rupees were needed for small payments. The method of 
forcing sovereigns simultaneously from several sides on the 
people was hardly correct. With the odds heavily against 
them the Government tried to take the citadel by storm and 
when the first attack was repulsed threw up their hands in 

After this, the currency system steadily deviated away 
from the aim jof 'an Affective gold standard. In 1900 the 
experiment of making people use gold coins failed- In 1902, 
the scheme of gold mint was dropped owing to the dis- 
approval of British treasury authorities. 1 In the same year 
the arrangement initiated in 1893 of issuing currency notes 
against gold received by the Secretary of State in London 
was made permanent 2 . In 1904 the Secretary of State 
notified his willingness to give rupees for sterling without 
limit at a rate based on Is, 4d. : Re- The reserve consti- 
tuted out of the profits on the coinage of rupeesthe Gold 
Reserve was remitted, according to the Secretary of State's 
decision, to London in gold and invested in sterling securi- 
ties. The original object of this reserve was to ensure 
convertibility of Indian currency into gold at Is- 4d.: Re- and 
thereby make gold standard effective. The Secretary of 
State, however, held that as a large demand for conversion 
of rupees into gold would arise only in an emergency when 
balance of trade turned against India and large payments 
had to be made in London, the Reserve should be kept in 
London. The Fowler Committee never intended that the 

*One of the reasons for disapproval was that "sovereigns were 
being rapidly attracted to India whenever required and there was no 
reason for believing that the position of gold standard in India would be 
strengthened or public confidence in the intentions of the Government 
of India confirmed by the mere provision of machinery for the manufac- 
ture of gold corns in the country," 

(Government of India Despatch quoted in the minute of Dissent to the 
Hilton Young Commissions Report, p. 105). 

The gold received by the Secretary of State was kept a* part of 
the reserve to back Indian paper currency. This reserve known as the 
Paper Currency Reserve was meant to ensure convertibility ot cur- 
rency notes into rupees and gold coins and was held hitherto in securities, 
silver and gold. Now 1 a part of it came to be held in gold in London. 


reserve should be so kept nor could they ever dream that 
the reserve would be drawn upon, as it was actually drawn 
upon in 1907 to the extent of 1,123,000, for expenditure 
on railway development- In 1907 a rupee branch of the 
Gold Reserve was created to ensure ready supply of rupees 
in exchange for gold tendered in India at Is. 4d- : Re. and 
to prevent thereby a rise in the exchange rate. The name 
of the Reserve after the creation of this branch was changed 
into Gold Standard Reserve which now consisted of a 
rupee portion and sterling securities portion. In 1908 when 
the balance of trade turned against India, exchange tended 
to fall and there was a strong demand for gold for export, 
the Government after much hesitation made available gold 
out of the London branch of Gold Standard Reserve against 
rupees received by them in India. 1 More than 8* millions 
were withdrawn out of the London branch of gold Standard 

All these various steps taken by the Government of 
India were nowhere recommended by the Fowler Committee. 
It appears that after having got loose of the sheet anchor of 
gold standard, the Government policy steadily drifted 
quite unconscious of the destination to be reached. The 
various steps the Government took during this period were 
in the nature of experiments to maintain the value of the 
rupee at Is- 4d. These steps led, however, to the adoption 
by India of a new kind of currency system known as Gold 
Exchange Standard- This system had no basis in law ; for 
i The composition of the Gold Standard Reserve at the beginning 
of 1908-09 was as follows : - 

Purchase value of sterling securities ... ... 13,186,^21 

Coined rupees held in India ... ... 4,000,000 

Gold temporarily forming part of balances of 

Secretary of State ... ... 1,131,223 

Outstanding debt from treasury balances ... 310 

Total ... 38,318,054 

1 By the end of the year, the value of coined rupees held in India 
increased to 10.586,734 and that of sterling securities declined to 

(Reports of the Head Commissioner of Paper Currency for 1908-09 and 


it was the result of a series of administrative acts. It was 
not adopted as a consistent whole ;.. for it was never 
consciously designed. 

As this system functioned upto 1917 in spite of the 
stress and strain of early war years, its mechanism may be 
clearly explained. 


The germs of a system resembling Gold Exchange 
Standard are to be found in the writings of Ricardo, the fam- 
ous British economist, who believed that a currency is in its 
most perfect state when it consists of a cheap material which 
has an equal value with the gold it represents. The gold is 
available for purposes of export only and does not enter 
into the internal circulation of the country. A system 
resembling the one advocated by Ricardo was introduced 
in several countries in an imperfect form but India was the 
first country to adopt it in a complete form. 1 

The essentials of Gold Exchange Standard system are 
three : 

(0 A cheap currency consisting of tokens. In India 
it consisted of silver rupees, half-rupees and currency notes 
which were unlimited legal tender. 

(if) The currency is not convertible into gold for inter- 
nal use but the Government or the Central Bank of the 
country makes gold (or the currency of a country on gold 
standard) available to the people for purposes of foreign 
payments at a fixed rate in return for cheap internal currency. 
In India, the Government made arrangements for converting 
internal currency into British currency based on gold. 

(m) Funds or reserves are kept in a foreign country to 
make gold (or currency of a gold standard country) 
available to the people for foreign payments. In the case 
of India the Gold Standard Reserve was constituted- 
One great merit of such a system is that the country 
1 J.M. Keynes : Indian Currency and Finance, p. 33. 


avoids the use of a costly gold currency but has gold at 
its command to make foreign payments. 

The Gold Exchange Standard in the form in which it 
was adopted in India is known as the Lindsay Scheme. Mr. 
A. M. Lindsay, the Deputy Secretary of the Bank of 
Bengal, 1 in his evidence before the Fowler Committee pro- 
posed a system only slightly differing from the one which 
was ultimately adopted. The Committee rejected the 
scheme on three grounds : 

(a) Any system without a visible gold currency would 
be looked upon with distrust. 

(b) Flow of capital to India would be checked. 8 

(c) India's gold standard would come to be based on a 
few millions of gold (or rather command over gold) kept 
in London. 

Mr. Lindsay had always maintained that "they must 
adopt my scheme despite themselves" and he was right. 

The Gold Exchange Standard system was worked in 
India by the sale of Council Drafts and Reverse Council 
Drafts. Council Drafts or Rupee Drafts were orders by the 
Secretary of State to the Government of India to pay rupees. 
These orders might be sent by post when they were called 
Council Bills or in a telegraphic form when they were 
called Telegraphic Transfers. These "orders 11 were sold to 
British banks, firms and importers in exchange for sterling 
%*. e., British money) received from them. The net result 
of the sale of Council Drafts was that the Secretary of 
State received sterling and the Government of India released 
an equivalent amount of rupees. The rate at which 
Council Drafts were to be sold was announced by the 

1 Before the establishment of Imperial Bank in 1920 there were 
three presidency Banks, in Bombay, Bengal and Madras* 

8 Presumably due to the distrust and uncertainty of foreign inves- 
tors about the return on their investments in the absence of an effective 
gold standard* 


Secretary of State. Council Drafts had been sold even 
before 1893 but only to the extent to which funds were 
required by the Secretary of State to meet certain expenses 
(called Home Charges) on behalf of the Government o f 
India. Instead of British importers of Indian goods 
sending sovereigns to India, people tendering them to the 
Government in exchange for rupees and the Government 
of India sending them back to London to meet their Home 
Charges, sovereigns were received by this method by the 
Secretary of State directly from British importers, the 
Indian exporters being paid in rupees. After 1893, however, 
the sale of Council Drafts was extended beyond.the require- 
ments of Secretary of State and in 1940 the Secretary of 
State announced his willingness to sell Council Bills on 
India without limit at Is. 4jd. : Re, By this means the balance 
of exports over imports could be paid for in London without 
the export to India on private account of more gold than 
was required by the people. By offering Council Bills in 
London the Secretary of State began to facilitate the 
course of Indian trade He also got a lever by which he 
could prevent the rate of exchange from rising higher than 
Is. 4J<5. : Re. It is obvious that so long as the Secretary 
of State offered one rupee for every Is. 4$d. received by him, 
no person wishing to remit money to India would have paid 
more than Is. 4|d. for a rupee to any other person or bank. 
Nor would any one care to ship gold or sovereigns direct to 

The sale of Council Drafts was one facet of the Goldt 
Exchange Standard system, the other being the sale of 
Reverse Council Drafts. The Reverse Council Drafts or 
Sterlin^Drafts 1 were orders by the Government of India 
to the Secretary of State to pay sterling (i.e., British 
currency) in return for rupees received by them. The 
result of the sale of Reverse Council Drafts 2 was that the 
Government of India received rupees and the Secretary 
1 So called because they were sold in a reverse direction to 
Council Drafts. 

8 Council Drafts and Reverse Council Drafts are often referred 
to shortly as "Councils" and ''Reverse Councils." 


of State released from his funds sterling. The demand for 
Reverse Councils, unlike that for Councils, arose rarely, for 
Reverse Councils would be demanded only when the pay- 
ments to be made abroad were larger than those made by 
foreigaers to this country and this could happen only 
when imports were larger than exports. Reverse Councils 
were not sold below the rate of Re. : Is. 3!i'd. 

By the scale of Councils and Reverse Councils the 
exchange was prevented from deviating very much from 
a fixed rate Is. 4d. : Re. It could fluctuate between 
1$. 3f?d. and Is. 4%d. to the rupee. 

To complete the explanation, a few words may 'be 
added about the funds out of which the Councils and 
Reverse Councils were paid out. The proceeds of the sale 
of Councils were credited partly to the Secretary of State's 
balances, partly to Paper Currency Reserve held in gold 
in London 1 , and partly to Gold Standard Reserve. The 
Councils were paid out of the Government of India's 
balances, the Indian portion ot Paper Currency Reserve or 
rupee branch of Gold Standard Resetve. The proceeds of 
the sale of Reverse Councils were credited to balances or 
Paper Currency Reserve by the Government of India and 
they were paid out of balances or Gold Standard Reserve 
by the Secretary of State. Thus the balances, Paper 
Currency and Gold Standard Reserve (with their respective 
functions of meeting current requirements, backing paper 
currency and meeting Reverse Councils) were in practice 
used indiscriminately to maintain the exchange value of the 
rupee. The diagram given below illustrates the mechanism 
of gold exchange standard. 

x The Paper Currency Reserve was the Reserve held against cur- 
rency notes in circulation in India, The Act of 1861 provided for the 
issue of a maximum of Rs. 4 crores of currency notes agamst securities 
heldl as part of the Reserve, the rest of the Reserve being held in silver 
coin. By 1911 many chaitges had taken place in the composition of the 
Resetve. The amount of note-issue against securities had been raised 
tp Rs 14 crores and the Reserve had come to consist of, besides securities 
(both rupee and sterling sectiritiesX gold coin and bullion and silver coin 
and bullion. It was held partly in England and partly in India subject to 
the proviso that all coined rupees were to be kept in India. 


The sale of a Council Draft of l,000-(Rs. 15,000) 

Secretary of 
State's funds 

British im- 
porter pays 

Gold Standard 

Paper Currency 


Council Draft 


Paid by Govern, 
ment of India. 

Government of India's 
I funds 

Gold Standard 

Paper Currency 


Rs. 15,000 




Rs. 15,000 

The sale of a Reverse Council Draft of Rs. 15,000=(l,000) 

Government of 
India's funds 

Indian im- 
porter pays 
Rs. 15,000 

Gold Standard 

Paper Currency 


Reserve Council Draft 

-Paid by Secretary 

of State 

+RS. 15,0 

Secretary of State's 

I funds 

Gold Standard 

Paper Currency 




The Chamberlain Commission, 2913 

The views of the Chamberlain Commission about this 
system may be stated briefly. The Commission was ap- 
pointed under the chairmanship of Mr. Joseph Austin 
Chamberlain in 1913 to enquire into the methods of main- 
taining exchange and the location and use of the reserves 
and balances and to report whether the existing practice 
was conducive to the interests of India. 1 The Commission 
found the Gold Exchange Standard most suited to the 
conditions in India. They were of opinion that to encour- 
age an increased use of gold in internal circulation was not 
to India's advantage and that the people of India neither 
desired nor needed gold as currency, There was no need 
of a mint for the coinage of gold but if Indian sentiment 
demanded it and the Government were prepared to incur 
the expense, one might be established for the coinage of 
sovereigns and half-sovereigns. If a mint could not be 
opened, the Government should renew the notification with- 
drawn in 1906 2 to receive gold at the Bombay mint in ex- 
change for notes or rupees. 

About Gold Standard Reserve they held that no maxi- 
mum limit to its amount could be laid down but a much 
larger portion of it should be held in gold. The proper place 
for the location of the Reserve, they said, was London. 
The abolition of rupee ( Indian) branch of the Reserve was 

The Paper Currency system, *they recommended, 
should be made more elastic by issuing a larger amount of 
notes against securities. 3 The use of notes as part of the 
currency should be encouraged and 500 rupee note 

The Commission also recommended that the Govern- 
ment should definitely undertake to sell bills in India on 

1 The Commission did not visit India and examined only a limited 
number of witnesses from India. 

1 See page 23, footnote 3. 

8 The amount of note-issue against securities (fiduciary issue) could 
be increased only by resort to legislation and so a large metallic reserve 
had to be kept. This made a sudden and large increase in note issue 
difficult for the Government, making the system of note issue inelastic 
The Commission recommended a larger amount of iiduciary issue. 


London at the rate of Is. Slid, per rupee whenever called 
uppn to do so. (It may be recalled that during the crisis of 
1907-08 they were sold only after considerable hesitation) 

The report of the Commission was published in Feb- 
ruary 1914 and in July 1914 the war broke out. The Govern- 
ment could not, therefore, take action on most of the 
recommendations of the Commission but they abolished 
the silver branch of the Gold Standard Reserve and readily 
offered Reverse Councils for sale when the demand for 
them arose at the outbreak of war- 


The outbreak of the war in July 1914 caused in India 
general dislocation of trade and business- Exchange be- 
came weak, 1 savings bank deposits were withdrawn, notes 
were presented for encashment in large quantities and gold 
was demanded in exchange for notes. All these were signs 
of panic and the Government took speedy action in dealing 
with them. 2 To deal with the weak exchange, sterling 
drafts were sold to the extent of 8,707,000. Demand for 
withdrawal of savings bank deposits was met by continuous 
payments and about Rs. 8 crores were paid within a few 
months. Notes were readily encashed to the extent of Rs. 10 
crores. The demand for gold in exchange for notes was 
met in the beginning but the issue of gold to private persons 
(i.e., apart from genuine trade purposes) was stopped on 
the 5th August, 1914. All these prompt measures led to 
the restoration of public confidence by the beginning of 1916. 

About the end of 1916, however, complications began to 
arise in the Indian currency system. The balance of trade 
began to turn abnormally in favour of India and during 

1 This always happens due to capital being withdrawn from the 
country in panic and a loss of confidence in the currency, 

Fortunately the banking crisis of 1913-14 had already had *the salut- 
ary effect of purging the country of unsound institutions whose collapse 
at a later stage would have greatly aggravated the situation . (Report of 
the Controller of Currency foi 1913-14). 


1916-17, 1917-18, ancf" 1918-19 the balance was much larger 
than the average pre-war balance. This was due to two 
causes: (a) increase in exports due to demand at high 
prices for raw materials and foodstuffs required for 
the use of the Allied Powers and (b) contraction of 
imports from United Kingdom and her Allies and 
complete cession of imports from Germany and Austria- 
Owing to this favourable balance of trade, a tendency was 
set up towards a rise in the rate of exchange and there was 
a heavy demand on the Government for rupees and currency 
notes. This heavy demand was further intensified by other 
payments that had to be made on behalf of the British Gov- 
ernment, British Dominions and America for expenses of 
war in Mesopotamia, Persia etc., and for purchases made in 
India The Government of India would not have been 
called upon to meet this heavy demand ail by themselves if 
gold and silver had flowed freely into India as in pre-war 
years. Restrictions had, however, been imposed on the 
export of gold and silver by countries engaged in war and 
the world production of silver had alsq fallen. The burden 
of liquidating the balance of trade was thus thrown wholly 
on the Government. 

The large purchases of silver by the Government of India, 
in order to meet the additional demand for currency, com- 
bined with a decrease in the world supply of silver and the 
increased demand from other countries, led to a rise in the 
price of silver. From 27 \d, per standard ounce in 1915 the 
price of silver rose to above 43 d. per standard ounce in Aug- 
ust 1917 and 55d- in September 1917 The price of 43d* per 
standard ounce deserves notice because at this price the ex- 
change value of the rupee was equivalent to its bullion value. 
If the price rose higher than 43d- per ounce, the exchange 
value of the rupee could not be maintained at ls.^4d. The 
rupee became worth far more than this in gold and if the 
Government did not gi\ e more than Is. 4d. in exchange for 
a rupee, the rupee itself would be melted or exported. On 
the other hand, the Government could not continue to sell 
Council Drafts at the rate of Is. 4d. i.e>, give rupees, whose 
value was rapidly rising, in exchange for sterling at that rat^e. 
With every rise in the price ot silver above 43d., the govern- 
ment had to raise the rate of exchange accordingly. The 


Gold Exchange Standard which depended for its satisfactory 
working on the sale of Council Drafts without limit and on 
rupee remaining a token coin broke down. The exchange 
value of the rupee now began to move in step with its 
intrinsic value as it had done from 1873 to 1893. 

The Gold Exchange Standard was an accidental find for 
India. It was almost a case of Jupiter going out to find 
fire and finding God. The system had received the praise 
and approval of Mr. J. M. Keynes and the Chamberlain 
Commission. India, they hSd seemed to say, had discovered 
a wonderful standard which lay in the "main stream of cur- 
rency evolution." 1 India had been saved from the cruel fate 
of being crucified on the cross of gold. She could well 
spread her tails like a peacock to the sun. But now that 
the standard broke down, 'the enchantment was at an end, 
the mirage evaporated, the soap bubble burst and the cha- 
riot of Cinderella relapsed into its original pumpkins and 
mice T 


IV Period : August 19171920 



In September 1917, the Government of United States 
took measures to control silver market and upto April 1919, 
the price of silver did not rise higher than 5Qd. per standard 
ounce. When the control over the silver market was with- 
drawn in May 1919, the price began to rise again. It rose 
to 58d. per oz. in May 1919 and to 78d. per oz. in December 
J919. As the price of silver rose, the rate at which Council 
Drafts were sold had also to be raised. It was raised as 
follows : 

28th August, 1917 Is. 5d. 

12th April, 1918 Is. 6d. 

13th May, 119 Is. 8d. 

12th August, 1919 Is. 10d. 

15th September, 1919 25. 

12th December, 1919 2s. 4d. 

1 J. M, Keynes, Indian Currency and Finance, p. 29. 


To meet the demand for rupees, the Secretary of State 
for India purchased silver for coinage into rupees but the 
demand was so enormous that the ordinary market could 
not satisfy it and an approach had to be made to the 
Government of U.S.A. for sale of silver dollars in their 
reserve* In April 1918, the United States Government 
passed the Pittman Act authorising sale of silver from their 
reserve and the Government of India purchased 200 million 
fine ounces of silver. If this huge quantity of silver had not 
been received, there might have been a serious currency 
crisis in India and the convertibility of currency notes into 
silver rupees would have had to be suspended. 1 

Besides raising the rate of exchange and purchasing 
silver, the Government of India also took measures to ex- 
clude private buyers from the silver market, conserve their 
stocks of gold and silver and to economise the use of silver. 
From 3rd September 1917, the import of silver into India 
on private account was prohibited. The melting of silver 
or gold coin was made illegal in June 1917 and tfie export 
of silver coin and bullion from India was prohibited in 
September 1917. Rs. 2| and one-rupee notes were issued* 
and nickel coins of eight, four and two annas were put into 
circulation. On 29th June 1917 an Ordinance was issued 
requiring all gold imported into India to be sold to the 
Government. Gold mohurs and sovereigns equivalent to 
15 rupees were also coined and issued to supplement the 
currency. The fiduciary portion 8 of the note-issue was 
increased from November 1915 onwards rising from Rs. 14 
crores in 1911 to Rs. 120 crores in 1919 and restrictions 

were imposed on the encashment of notes. This led to 
a small discount or batta on notes in many parts of the 

1 At one time in the year 1918. the rupees in the Currency Reserve 
available for encashment of notes amounted to a little more than 4 crores 
against a total note circulation of 115 crores. 

* The issue of these notes was stopped from 1st January 1926. 

* The portion of note-issue not backed by metallic reserve but by 


The Babington Smith Committee, 1919 
All these measures were taken to cope with an unfore- 
seen situation of great difficulty. As the tension created 
by the war relaxed, restoration of stability in exchange 
became necessary. 

In May 1919, therefore, a Committee was appointed 
tinder the chairmanship of Sir Henry Babington Smith to 
Examine the effect of the war on Indian exchange and 
currency system, to suggest modifications in it and to make 
recommendations with a view to ensuring stable exchange 
Standard. These terms of reference precluded the Com- 
mittee from considering or recommending any other system 
of currency. 

The Committee emphasized the importance of stability 
of exchange for production and trade and recommended 
that the exchange value of the rupee be fixed at 2s. (gold) 
ie., Rs. 10 : one Sovereign. 1 Two points about this recom- 
tnendation deserve notice : firstly, a high rate of exchange 
was to be fixed and, secondly, the value of the rupee was to 
be fixed in terms of gold rather than sterling. 'During the 
war, sterling, i.e. British paper money, did not remain 
equivalent to the gold it represented. It had depreciated 
in relation to gold. The Committee were in favour of 
linking the rupee to gold rather than depreciating sterling. 

A high rate of exchange was recommended by the 
Committee to ensure that the rupee would remain a token 
coin. By making the rupee a token coin the Gold Ex- 
change Standard could be made to function as before-* 
The Committee favoured a high tate of exchange on othet 
grounds also. A high rate of exchange would secure imports 

1 At this rate one Rupee= 11.30016 grains of fine gold. 

1 It may be mentioned here that the fixation of a high rate o exch ange 
: t#as not the only possible way of restoring the token character of the 
rupee. Two othe^r walys of achieving the same end were th debasement 
of the rupee coin (i.e. reduction in its weight or fin^neis) and the 
cpmplete or partial suspension of the convertibility of rup^e notes into 
riiryee coin. These wet e in the pte vailing state of public confidence 


of goods at lower prices or at least check the rise of prices 
and thus reduce social and economic discontent. 1 It would 
have no adverse effect on exports of Indian goods because 
of the large world demand for Indian raw materials and 
foodstuffs. It would help industrialists, too; for it would 
keep down the prices of imported store& and machinery and 
by keeping low the cost of living check a rise in the wages 6f 
the workers. Finally, it would secure an economy in Home 
Charges ; for a given amount of them could be remitted 
with a smaller number of rupees. 

Mr. D. M. Dalai, a member of the Committee, was 
opposed to the stabilization of the rate at 2s. (gold) and 
wrote a minority report. He was in favour of maintaining 
the old ratio of Is- 4d. : Re. The rise in the price of silver 
was the chief argument for raising exchange ratio but Mr. 
Dalai held that the rise in the price of silver was artificial 
and could have been prevented by allowing export of silver 
from India after the War. He also believed that a rise in 
exchange ratio would cause setback to several Indian indus- 
tries and big losses to Indian exporters. It would also in 
volve enormous loss to India on account of revaluation in 
terms of rupees of reserves invested in sterling securities and 
of gold held as part of the metallic reserve against the note- 
issue. Mr. Dalai regarded Gold Exchange Standard as un- 
suitable to Indian conditions and was generally in favour of 
abolishing the control exercised by the Secretary of State 
over Indian exchanges and removing restrictions on the free 
movement of gold and silver bullion to and from India. 

The main conclusions and recommendations of the 
Babington Smith Committee may be set down as follows 
Those relating to stabilization of the Rupee 

(f) It is desirable to restore stability of the rupee -and to 
re-establish the automatic working of the currency system. 

1 If the rate of exchange be 25. (gold) or Rs. 10 to one Sovereign, 10 
rupees had to be paid for an imported commodity like cloth or sugar 
worth one sovereign ; if the rate be lower, say, 1*. 4d. or 15 Rs. : , the 
price paid is higher. 


(if) The exchange value of the rupees should be fixed in 
terms of gold rather than sterling and stabilized at 25. (gold) 
or Rs. 10 to one sovereign (one rupe^e ==11- 30016 grains of 
fine gold). 

Those relating to restoration of automatic working of 
the system 

(iif) Council Drafts may be sold by the Secretary of State 
in excess of his immediate needs when a trade demand for 
them exists. 

(j,v) During periods of exchange weakness, the Govern- 
ment of India should be authorised to sell Reverse Councils 
without previous reference to the Secretary of State. Incon- 
venience and delay were caused by the necessity of consult- 
ing the Secretary of State beforehand and public confidence 
in the system was not ensured. 

GO The import and export of gold into and from India 
should be free from government control. 

(yf) The prohibition on the import of silver and import 
duty on silver should be removed as soon as convenient. The 
prohibition on tfre export of silver should be retained to pre-r 
vent depletion of silver. 

Those relating to use of gold currency 

(yif) To encourage the increased use of gold in internal 
circulation would not be to India's advantage. Gold is best 
kept in Government reserves where it is available to meet 
demand for foreign remittance. Gold coins may, however, 
be issued in moderate quantities and sovereigns may be coin- 
ed and issued. 

(yiif) The obligation of the Government to give rupees 
for sovereigns should be withdrawn but opportunities should 
be given to the public when introducing the new ratio to ex- 
change sovereigns in their possession at the rate of 1 : 
Rs. 15. 

Those relating to reserves 

(ix) Profits on the coinage of rupees should continue to 
be credited to Gold Standard Reserve, trie amount of which 


cannot yet be fi^ed. The Reserve should contain a consi- 
derable proportion of gold, not more than one -half of the 
gold being held in India. The invested portion ^hould 
continue to be held in London in liquid securities. 

O) The metallic backing behind paper currency in the 
Paper Currency Reserve should be fixed by law at a mini- 
mum of 40 per cent of the gross circulation. The maximum 
for fiduciary issue should be retained at Rs. 120 crores for a 
limited period. The portion invested in Government of 
India securities should be limited to Rs. 20 crores. To 
meet the seasonal demand for additional currency, notes 
upto Rs. 5 crores, over and above the fiduciary issue, may 
be issued as loans to the Presidency banks against export 
bills of exchange. 

(xi) The silver and gold in the Paper Currency Reserve 
should be held in India Except for transitory purposes. 





V Period : February 1920 September 1920 
The recommendations of the Committee were accepted 
by the Secretary of State in February 1920, and various 
notifications were issued to give effect to them. It wa$ 
notified that Council Drafts would be offered for sale at no 
fixed minimum rate and Reverse Council Drafts would be 
offered in future, if required, at a rate based on 25. gold. 
Wartime restrictions on the import (but not export) of 
silver bullion, melting of silver coins and import and export 
of gold bullion and coin were removed- By the Indian 
Coinage (Amendment) Act of 1920 the sovereign was made 

legal tender. 

About the beginning of February 1920 a keen demand 

arose for remittances to London owing to an enormous 


increase in imports and a fall in exports. The anxiety of 
European businessmen to transfer their accumulated profits 
from India to London also added further to the demand. 
Steps were at once taken to maintain the new exchange 
rate of 2s. (gold), by offering Reverse Councils at a rate 
based on the sterling equivalent of 25. (gold). The sterling 
equivalent of 25. gold could be calculated only from the 
dollar sterling rate. 1 As sterling was not equivalent to gold 
in England, its depreciation in relation to gold could be 
measured only from its ratio to dollar which was at par with 
gold. If the value of sterling in terms of dollar fell, the 
sterling equivalent of 25. (gold) would rise and sterling- 
rupee exchange ratio based on 25. (gold) would also rise. 
This may be made clearer by an example. 

A definite quantity of gold=4'8 dollars =one pound 
sterling=one sovereign 13 * 10 Rs- 

If sterling depreciates by 50% in relation to dollar 

The same quantity of gold=4*8 dollars=r5 pound 
sterling=one sovereign 10 Rs. 

As sterling depreciates, therefore, the same number of 
rupees begin to purchase a larger amount of sterling. 

In the beginning of February 1920, the cross rate fell 
and the value of the rupee in terms of sterling rose- The 
Indian exporters fearing further rise began to sell their 
export bills. This accentuated the tendency towards a rise 
and the market rate reached 25. 10|d. (sterling) on llth 
February 1920. After this, however, the sale of export 
bills, fell off and the sterling value of the rupee began to 
fall. Three other forces began to operate to accentuate 
this tendency towards a fall 

(i) More rapid fall in the level of sterling prices than 
rupee prices.* 

(ii) Unfavourable balance of trade which commenced 
in June 1920. 

(m) Fall in the price of silver, the price in June 1920 
being 44d. per standard ounce- 

1 Often referred to as London-New York cross rate, 
8 The British Government had begun to deflate currency with a 
vie w eventually to making sterling equivalent to gold. 


The Government tried to maintain the rate at first at 
2s. (gold) and then from 24th June to 28th September 1920 
at 25. (sterling), the market value of the rupee having fallen 
lower. The Reverse Councils sold at the above rates were 
met by the sales of sterling securities and Treasury bills in 
the Paper (Currency Reserve at prices fhuch lower than 
those at which they were purchased. The amount paid out 
of Paper Currency Reserve from the beginning of 1920 to 
the end of September was nearly 55'4 millions but the 
sterling value of the rupees purchased was only 25 millions. 
The loss to the Indian exchequer caused by the ill-advised 
attempt to maintain the rupee at 2s. amounted to Rs. 40 
crores- The Indian importers who had ordered goods 
from abroad expecting to pay one rupee for every 2s. also 
suffered serious losses owing to the failure of the Govern- 
ment to maintain the rate. They were also put to great 
hardship by the fall in prices and the rise in bank rate 
caused by the contraction of currency by the Government. 1 
Many of them were driven the verge of bankruptcy. 


VI Period : October 1920-1927 

The Babington Smith Committee based ;their recommend- 
ation for the stabilisation of 25. rate on the wrong conjec- 
ture that the price of silver would continue to rule high for 
some time to come. The conditions of the contemporary 
world were, however, much too uncertain and a wiser course 
for the Committee should have been not to recommend 
any definite exchange rate. In fact, they did say while 
examining the possibility of a large and rapid fall in world 
prices that if such a fall occurred ('contrary to expectation')* 
the maintenance of exchange at the proposed rate might be 
endangered. " In that case it would be necessary to consi- 
der the problem afresh".* But otherwise, they were against 

1 Currency was contracted to prop up the tottering exchange ratio. 
When the supply of money in the market becomes less, the rate of loans 
rises. Currency contraction lowers prices also. 

1 Report, para. 51. 


the postponement of decision in this regard ipr three 
reasons : first, they had been called upon to recommend 
measures for the restoration of a stable gold exchange 
standard and they did not want to shirk their responsibility ; 
second, they did not consider stability unattainable; and third, 
they considered continuance of* the existing uncertainty, 
involving as it did prolongation of Government control over 
currency, open to serious criticism. 1 

The Government of India showed an extraordinary 
alacrity in taking action on the Committee's recommenda- 
tion. They could have waited a little longer. 

But even after the Committee had made its recommenda- 
tion and the necessary action had been taken on it, it was 
open to the government to retrace their steps as soon as 
they found the new ratio untenable. They need not have 
prolonged an egregious blunder at a heavy cost. 

Eventually the attempt to maintain the rate at 2s. had to 
be abandoned. At the end of September, the Government 
suspended entirely the sales of the Reverse Councils- The 
intervention of the Government thereafter grew less but 
exchange was not left entirely to look after itself. For 
some time, the exchange rate fluctuated from day to day 
according to the supply of and demand for exchange and at 
a time of general slackness in foreign trade, it was naturally 
particularly sensitive to the export and import of gold and 
silver bullion 2 . The Government continued ,to effect some 
measure of currency contraction to attain some parity bet- 
ween internal prices and the falling world prices. But as 
the world prices were falling rapidly, the adjustment took 
the form of a fall in exchange rather than a rapid and heavy 
fall in internal prices. 

In 1921 the balance of trade was still against India and 
the rate of exchange which had fallen to nearly Is. 5d. in 
December 1920, fell still lower to 15. 2|d. (under Is. gold) 
in March 1921. -In 1922, the balance of trade began to turn 
favourable to India and the sterling value of the rupee rose 
till it reached its pre-war level Is. 4d. sterling in January 
1923- From January 1923 to June 1924, the sterling rate 
moved between Is. 4aW. and Is. 5/a<i, the gold rate being 

* Cf . Sir W. M. Hailey's Budget Speech for 1921-22. 


more or less stable round Is. 3d. (the limits being about 
Is. 3 a " a <f. and Is. 3%d. 1 It rose to Is. 6d. sterling (about Is. 4d- 
gold) in October 1924 and the action of the Government 
was now directed towards preventing its rise above that 
rate. After the end of May 1925 the rupee ratio was kept 
in the vicinity of Is. 6d. gold. 

A rise in exchange rate above Is. 6d. sterling was preven- 
ted by the Government by introducing the practice of pur- 
chasing sterling in India. The purchase of sterling in Jndia 
has the same effect as the sale of Council Drafts in London, 
i.e., sterling is given by banks and firms in London for credit 
to the account of the Secretary of State and rupees paid to 
them in India. The advantages claimed for the system of 
sterling purchases are the following 

(i) the initiative in making remittances of sterling to 
London is transferred to the Government of the India to 
whom it should rightly belong. 

(ii) the purchases of sterling can be regulated with refer- 
ence to the conditions of Indian exchange market and heavy 
fluctuations in exchange rate avoided. 

The system of purchase of sterling has gradually displac- 
ed since 1924 that of the sale of Council Drafts. 

In pursuance of the recommendations of the Babington 
Smith Committee, changes were also made in the Acts go- 
verning the paper currency system. These were incorporat- 
ed in the Consolidating Act of 1923 as amended in 1923 and 
1925. The Act laid down permanent provisions for the re- 
gulation of paper currency but as the permanent provisions 
could "be carried into effect only after some time owing to 
the aftermath of abnormal war conditions, certain transitory 
provisions were also laid down. The permanent provisions 
were (i) the metallic portion of the Reserve was to be at 
least 50 per cent of the whole ; (if) the Government of India 
securities in the Reserve were to be Rs 20 crores in amount 
and of these, the created securities were not to exceed Rs. 12 
crores; (Hi) the Governor-General-in-Council was empowered 

1 Appendix 3 to the Report of the Royal Commission on Indian 
Currency and Finance, Vol. ii, p 33. 


to issue currency notes upto Rs. 5 crores in amount against 
inland bill of exchange maturing within 90 days. 1 This addi- 
tional issue of currency could be made on payment to the 
Government by the Imperial Bank of India of a rate not 
lower than 8 per cent. The amount of extra note issue was 
raised from Rs. 5 crores to Rs. 12 crores by an Amending 
Act of 1923 and in 1924 it was laid down that of these, Rs. 4 
crores were to be issued when the Imperial Bank rate rose to 
6 per cent and the remaining Rs. 8 crores when it rose to 
8 per cent. The transitory provisions were : (i) the amount 
of securities in the Reserve was to be Rs. 85 crores (raised 
later to Rs, 1000 crores in 1925), () the Government were 
authorised to create securities (ad hoc securities) and issue 
them to the Controller of Currency but the amount of 
securities was to be gradually reduced to Rs. 12 crores the 
maximdm amount permissible under permanent provisions. 



VI Period : October 19201927 (ConfeO 


In April 1925 England returned to gold standard and Is. 
6d. sterling became equivalent to Is. 6d. gold. In August 
1925 a Commission was appointed under the chairmanship 
of Mr. Edward Hilton Young " to examine and report on 
the Indian exchange and currency system and practise, to 
consider whether any modifications are desirable in the 
interests of India and to make recommendations." 

The report of the C ommission was published in 1926. 
The three main recommendations of the Commission 
related to 

(i) the selection of a standard of currency, 
1 This provision was introduced to make the note issue more plastic 
in order to meet the seasonal demand for currency. 


fa') the establishment of an authority to control the 

(n'O the rate at whicn the rupee should be stabilized. 
The Commission made the following recommendations 
(0 Gold bullion standard should be adopted as the 
system of currenc3^. Gold coins should not be introduced 
into circulation but an obligation should be imposed by law 
on the currency authority to buy and sell gold in the form 
of gold bars without limit in exchange for rupees and cur- 
rency notes. The legal tender quality of sovereigns and half- 
sovereigns should be removed. There should be no legal 
obligation on the Government to give rupees for currency 
notes. , 

(i-i) The control and management of currency should be 
entrusted to a central bank (to be called the Reserve Bank 
of India). 

(>i-i) The rate of exchange should be stabilized at Is. 6d. 

(ir) One rupee notes should be reintroduced and should 
be full legal tender. 1 Notes other than the one rupee notes 
should be legally convertible into legal tender money, i e>, 
notes of smaller denominations or silver rupees at the option 
of the currency authority. 

(v) The Paper Currency Reserve and the Gold Standard 
Reserve should be amalgamated. Not less than 40 per cent 
'of the combined Reserve should consist of gold securities. 

Sir Purshotamdas Thakurdas, a member of the Corpmis- 
sion, wrote a minute of dissent in which he emphasized that 
the change from gold standard to gold exchange standard in 
the past was "in absolute contravention of the currency value 
officially adopted in 1899, binding on the Government and 
the country." He, however, agreed to the gold bullion stand- 
ard recommended by the Commission provided there was no 
interference with the free m-flow of geld into India except with 
due publicity and the concurrence of the legislature. He was 
of opinion that the demonetisation of sovereign and half- 
sover1|ign was unnecessary. 

As regards a central bank he held that in the special 

conditions of India, the ends in view would be better served 

by developing the Imperial Bank of India into a full-fledged 

central bank. If, however, the share-holders of the 

1 See p. 39, footnote 2. 


Imperial Bank did not agree to a restriction of their 
dividends, there would be no alternative left but to start a 
new central bank. 

As to ratio he disagreed that Is. 6d. ratio was the de 
facto ratio and that prices, wages and finance had adjusted 
^themselves to it- He recommended that the rupee should 
be stabilized at the rate which prevailed for nearly 20 years, 
viz., Is. 4d- to the rupee. 

The conclusions and recommendations of the Hilton 
Young Commission relating to currency standard, currency 
authority and exchange rate gave rise to acute controversy* 
These may be examined further in the next three sections. 



A sound monetary standard must satisfy certain essential 
requirements, such as simplicity, certainty and stability and 
the suitability of the standard must be judged by the extent 
to which it satisfies them. The Hilton Young Commission 
had to select a standard that would meet these require- 
ments. The choice had to be made out of four possible- 
standards : 

(0 The pre-war sterling exchange standard in a per- 
fected form, i. e., with its defects removed. 

(if) Gold exchange standard* 

(in) Gold standard with gold currency. 

(tV) Gold standard without gold currency or gold 
bullion standard. 

The Commission rejected the first three alternatives 
and recommended for adoption gold standard without gold 

Gold Exchange Standard : A Critique 
The standard which worked in India from about the 
beginning of the present century to 1917 was in fact sterling 
exchange standard. Under it Indian currency was con- 
vertible into sterling but so long as pound sterling was 
convertible into pound gold, it tiras as good or as bad as 
gold exchange standard. This standard worked fairly well 


and secured stability of exchange for about fifteen years. It 
had the merit of being cheap because gold did not circulate 
as currency. It had, however, certain serious defects which 
may be described as follows : 

(0 It was not simple and intelligible to the people. 
The internal currency consisting of rupees and currency 
notes was not convertible into anything tangible and visible 
(such as gold). It was convertible into sterling for making 
payments outside the country on those rare occasions when 
the balance of trade turned against India. The working of 
the standard involved a good deal of government control 
and interference and this did not inspire confidence in the 
minds of the people. 1 

(ii) It had resulted from a series of administrative noti- 
fications. It was not subject to any statutory regulation or 
control but depended for its working on a policy of the 
Government. There was, for example, no statutory obli- 
gation on the Government to sell Reverse Councils by 
which the rate of exchange was prevented from falling 
below Is. 4d. The standard had thus no definite legal 

(in) It depended for its satisfactory working on rupee 
remaining a token coin. If the price of silver rose above a 
certain point the intrinsic worth of the rupee became 
greater than its exchange value and it became profitable to 
melt it or export it. The standard was thus subject to the 
danger of rupee disappearing fi;om circulation. It broke 
down in 1917 when the gold- price of silver rose above 43d. 
per standard ounce. 

(iv) It was a dependent standard because under it the 
internal currency was linked not to gold but to the currency 
of a foreign country. It was thus exposed to the currency 
and credit changes in England. As the Hilton Young 

* "However complete the integrity and howeve^ great the intelligence 
on which official action is based, an automatic system which does not 
depend upon such action for its operation is greatly to be preferred." 
Babington Smith Committee's Report, para, 35. 

** We believe that a pure exchange standard is no more and no 

less liable to manipulation than a gold standard ; but that is not the 
opinion of the Indian public and it is essential that whatever system of 
currency is adopted should be one that is capable of securing the confi- 
dence of Indian public opinion,*' Hilton Young Commission' s Report, para. 


Commission remarked, " there is undoubted disadvantage 
for India in dependence on the currency of a single country, 
however stable and firmly linked to gold-," 

(o>) It was not automatic in its working because the 
sale of Councils and Reverse Councils did not lead to an 
automatic expansion and contraction of currency. The 
expansion and contraction were regulated by the Govem- 
ment- In 1919-20-1921, for example, Reverse Councils of 
the value of more than 55 millions were, sold and under 
an automatic system, internal currency of the value of 
about Rs. 47 crores would have been withdrawn from cir- 
culation. But the actual contraction amounted to only a 
little over Rs. 34 crores. Similarly when Council Bills 
were sold, currency was not expanded to the same amount. 

(vi) It was not elastic, i. e., it did not make a satisfactory 
provision for an increase in currency in .busy seasons and 
times of financial crisis- When crops have been harvested 
and are moved, there arises an increased demand for 
currency but under the pre- War system this could not be 
properly satisfied- 1 Not was there any provision for an 
emergent issue of currency. 

(am) The two reserves the Gold Standard Reserve and 
Paper Currency Reserve which were kept to maintain the 
value of token currency were governed in practice by transi- 
tory provisions. Their functions also were confused and 
there was overlapping of the purposes for which they were 
maintained. The original function of the Paper Currency 
Reserve was to provide for the convertibility of notes into 
rupees and that of the Gold Standard Reserve was to main- 
tain the external value of the rupee. In practice, however, 

1 Currency could be expanded only by the sale of Council Bills wbich 
would be demanded when goods were exported. There was no provision 
by which currency could be expanded to meet the demands of internal 
trade. The following passage occurs in the evidence of Lord Inchcapc, 
who was for some years the chairman of the* Finance Committee of the 
Secretary of State's Council, before the Chamberlain Commission : 

Mr, J, M. Keynes : " But there is no means by which the amount of 
currency in India can be increased from within India, as is the case in 
every civilised country in the world ?" 
Lord Inchcape : ** There is no means. " 

(Minutes of Evidence. Vol. II, P. 101.). 


the Reserves were used indiscriminately to maintain the ex- 
ternal Value of the rupee and notes- There was also duality 
in the control of currency and credit: policy. 

Most of these defects were pointed out by the Commis- 
sion who concluded that an exchange standard whether 
based on sterling or gold would npt remedy the defects of 
the Indian currency system. * 

Pros and Cons of Gold Standard with Gold Currency 

Gold standard with gold currency had been demanded by 
the Indian commercial opinion as far back as the middle of 
the last century and the demand had been reiterated many 
a time since then. The Fowler Committee recommended in 
1898 a close approximation of gold standard with gold cur- 
rency with a view to the '' effective establishment in India 
of a gold standard and currency based on the principles of 
free inflow and outflow of gold- " That aim was gradually 
deviated from and gold exchange standard came to be adop- 
ted- The Chamberlain Commission (1913) were not in 
favour of introducing gold currency but they conceded that 
" if Indian sentiment demands it and the Government of 
India are prepared to incur the expense, " a mint for the 

coinage of sovereigns may be established, adding that " it is 
pre-eminently a question in which Indian sentiment should 
prevail." The Babington Smith Committee (1919) were 
precluded by their terms of reference from recommending 
any standard other than gold exchange standard When 
the Hilton Young Commission was v appointed in 1925, the 
question of a suitable standard for India came once again 
into prominence. 

The officials of the Finance Department of the Govern- 
ment of India submitted to the Hilton Young Commission a 
scheme for the introduction of gold standard with gold cur- 
rency. The scheme assumed that the management of paper 
currency and the conduct of Government remittances to 
London would be transferred to the Imperial Bank of India. 
The main features of the scheme were as follows : 

(7) Gold coins and bank notes to be unlimited legal 
tender. Rupees to remain unlimited legal tender in the 


beginning but after some years to be made limited legal 
tender upto Rs. 50 only. 

(if) A statutory obligation to be imposed on the 
Government to give gold coin in exchange for gold bullion 

(m') Bank notes to be payable on demand in gold coin. 
(iv) A statutory obligation on the Bank to buy gold. 

(v) A Reserve containing a certain percentage of gold 
and securities (gold and sterling) to be maintained. 

(vi) The Imperial Bank to supply funds to the Secre- 
tary of State for meeting Home charges. 

This scheme was to be introduced gradually over a 
period of about 10 years. It involved the sale of a large 
quantity of silver and the purchase of gold to the extent of 
about 103 millions. 

The Commission rejected the scheme and the objec- 
tions they raised against it are the main objections that 
might be raised against any proposal to introduce gold 
standard and currency in India. The grounds on which the 
scheme was rejected may, therefore, be stated. 

Objections to the scheme of gold standard with gold currency 

(0 "A large extra demand (for gold) from India 
would cause increased competition for gold among the 
countries of the world and lead to a substantial fall in gold 
prices and a substantial curtailment of credit". India in 
common with other countries would suffer from such fall 
in prices and curtailment of credit. 1 

(if) The amount of gold that would be required for 

1 Gold is the basis of credit because in countries whose currency is 
convertible into gold, it is the backing behind the paper currency in 
circulation. If India purchased large quantities of gold to maintain them 
as a backing behind its paper currency, the demand for gold would in- 
crease. -A rise in the demand for gold would raiie its price in .terms of 
commodities, i. e,, more of commodities would be given to get a certain 
quantity of gold. Tn other words, the prices of commodities in terms in 
gold would fall. A fall in prices would lead to depression in trade and 
India as a unit in the world trade system would suffer. An increased 
demand for gold from India would also mean that there would be less of 
gold available for other countries as a backing behind their paper curren- 
cies. This may necessitate contraction of paper currency with a view to 
maintain its convertibility into gold and this would involve contraction 
of credit. 


ensuring convertibility of notes and rupees cannot be 
accurately estimated. For it is possible that people may 
begin to prefer gold coins to notes and to that extent notes 
would be replaced by gold coins- The fear of a fall in the 
status of the rupee might similarly bring out a huge number 
of rupees for conversion into gold coins. The actual 
demand for gold might thus turn out to be much greater 
than, the estimated demand. 

(iii) The fall in the demand for silver due to the adoption 
of gold standard would depress the price of silver. This 
would not only involve the sale of surplus silver at a low 
price but would also lower the value of the savings of poorer 
Indian people who invest their savings in silver ornaments. 

(n>) The adoption of gold standard by India might lead to 
the demonetization of silver by China also. This would 
raise the price of gold and depress the price of silver still 
further. In any case, the exchanges with China would be 
dislocated by any fall in the price of silver, China being a 
silver standard country- This would affect adversely trade 
with China, * the only great, undeveloped market left for 
the expansion of international trade/ 

(y) It would not be easy to obtain the large amount^ 
of gold without the co-operation of Great Britain 
and U.S.A. and both the countries viewed with alarm the 
prospect of a large demand for gold from India inasmuch as 
it would upset world prices. 

(yi) The scheme would prove costly and though the costs 
could not be estimated accurately, it would be considerable. 
It might be in the neighbourhood of Rs. 3 crores a year for 
about ten years 

To these objections of the Commission may be added a 
few others which apply to gold standard and currency in 
general (rather than to any particular scheme of it) 

(yif) Gold currency standard is expensive in that it 
involves the circulation of a very costly metal as currency. 
It would be better by far that gold should remain in the 
reserves to lend stability to exchange. 

(vm) Gold currency is a sign of backward civilization 
and an obsolete ideal. Many countries which returned to 
gold standard after the last War did not introduce geld 


(ix) The bulk of internal transactions in India involve 
small payments for which rupees rather than gold coins are 
required by the people." Gold coins will, therefore, be of 
no use unless they are of very small value. 

As there has been an insistent demand in this country 
for gold standard with gold currency, it is necessary to know 
the reasons for which it was favoured- 

Merits of Gold Standard with Gold Currency 

(0 Gold standard with gold currency is an automatic 
standard and prevents undue government interference with 
currency and exchange. Under it the inflow and outflow 
of gold are free and by producing their reaction on prices 
set into operation the natural correctives to fluctuating 

It is however, difficult to say if the standard would work 
automatically in India. If the imported gold is hoarded by 
the people and thus 'sterilised', prices may not rise and if 
gold does not come out of circulation for being exported 
when the balance of trade is against India, prices may not 
fall. 3 The natural correctives to exchange will not then 
operate. This is, however, on the assumption that the 
hoarding habit of the people will persist even after the 
introduction of gold currency. 

() The introduction of gold currency would discourage 
the uneconomic habit of hoarding gold. It would make the 
rural masses familiar with gold coins and hold out the 
assurance that all other forms of currency being convertible 
into gold are as good as gold. 

1 When exports exceed imports, the rate of exchange tends to rise 
and gold begins to flow into the country. Normally the gold will be 
banded over to the currency authority in return for internal currency. 
The consequent expansion of currency will result in raising internal 
prices. The rise in prices will make the country a good market to sell 
goods in and a bad market to buy goods from, thus increasing imports and 
checking exports. The initial tendency towards a rise in exchange rate 
set up by an excess of exports over imports will thus be arrested. A 
similar corrective will begin to operate if exchange tends to fall due to 
the excess of imports Gver exports. 

9 "All experience goes to show that so long as the public have the 
option of making payments in tokens or in gold it is the surplus tokens 
arid not the gold in circulation which will seek an outlet at a time o 
weak exchange", Chamberlain Commission's Report, para. 62. 


The Hilton Young Commission differed from this view 
and held that "the mere act of putting gold into circulation 

would not develop the banking and investment habit"- 

What was needed, they said, was confidence in the stability 
of currency. 

(Hi) Gold standard with gold currency would inspire 
confidence of the people because the backing behind 
currency would be visible and tangible, much more so than 
under any other form of gold standard. 

(n>) The Indian people do want gold in circulation, as 
is evident from the large absorption of imported sovereigns 
from 1900 to 1914. 1 Besides, the 'weight of good academic 
opinion* is in favour of gold currency and this is 'pre-emi- 
nently a question in which Indian sentiment should prevail*. 

GO Gold currency is a stage in monetary evolution 
towards an ideal system under which currency would be 
convertible into gold but gold coins will not circulate on any 
appreciable scale India will have to pass through this stage. 8 

Gold Bullion Standard as recommended by the 

The Commission recommended gold bullion standard, as 
they called it, for adoption by India. The main features of 
the standard were the following 

(0 An obligation was to be imposed on the currency 
authority to buy -and sell gold at a certain fixed rate in 
quantities of not less than 400 fine ounces (=1065 tolas). In 
other words, the rupees and currency notes were to be made 
convertible into gold bars weighing not less than 400 fine 
ounces. There was to be no limitation as to the purpose 

*It is of interest to note that in 1911-12 and 1912-13 the Controller 
General and the Head Commissioner of Paper Currency made special 
enquiries to find out the actual use to which sovereigns were put 
by the people and the Accountant Generals. Punjab who made detailed 
enquiries in 1911-12 reported that "the popularity of the sovereign as 
currency is greatly on the increase and there is practically no part of the 
Punjab or Frontier Province where it is not eagerly sought after and 
accepted," Similar reports were received from other parts of India. 
Report of Controller General, for 1911-12, pp 14-21, 1912-13, pp- 22-26 
and 1 913- 14, Appendix III. 


for which gold was required but the conditions as to the 
sale of gold were to be so framed that normally the currency 
authority would not be called upon to supply gold for non- 
monetary purposes. 

(n) Sovereign and half-sovereign were not to remain 
legal tender, 1 but the rupee was to continue to be full legal 

(m) Government Savings Certificates were to be issued 
to bring home to the masses that gold was the standard of 
value and that gold and rupees were mutually convertible - 
People could purchase these certificates and invest their 
savings in them. After three or five years, they could 
receive the principal along with the interest in rupees or 
gold at their option. 

(in) The existing currency notes were to remain conver- 
tible into rupees but the new notes to be issued were not to 
be legally convertible into rupees. Facilities for conversion 
of currency notes into rupees were, however, to continue 
to be provided. 

(y) One rupee notes which would be full legal tender 
but not legally convertible into rupees were to be issued- 

(vi) Gold Standard Reserve and Paper Currency Reserve 
were to be amalgamated 

The effect of the adoption of this system would be that 
(a) internal currency would consist of tokens rupees and 
currency notes and (b) currency notes would not be conver- 
tible into rupees but both currency notes and rupees would 
be convertible into gold bullion. 

Many advantages were claimed for the system by the 
Commission. Firstly, it would secure stability of exchange 
by ensuring convertibility of currency into gold at a fixed 
rate. Secondly, it was simple and certain because the 
backing behind the currency was one of gold into which 
internal currency would be convertible. It would, therefore, 
inspire confidence of the people. Thirdly, it was automatic 
because currency would be expanded when gold bars were 
given to the currency 'authority to obtain notes or rupees 
1F They were made legal tender by the Act No. XXII of 1899 (see p, 25). 
Their demonetization was necessary to secure automatic contraction and 
expansion of cuirency. Gold coins in circulation by taking the place 
of rupees and notes would prevent the automatic working of gold bullion 


and would be contracted when notes or rupees were given 
to the currency authority to obtain gold bars. Fourthly, 
gold would remain in the reserves and costly gold currency 
would not be introduced into circulation. Fifthly, it would 
pave the way for the introduction of gold currency at some 
future date if it was thought desirable to do so. Gold 
currency could be introduced when sufficient gold had 
accumulated in the Reserves. 

The gold bullion standard recommended by the Commis- 
sion was not full-fledged gold standard. The backing 
behind internal currency was not very tangible for ordinary 
people- Only bankers and bullion brokers could take 
advantage of the facilities for obtaining gold bars of 400 fine 
ounces (400 ounces- Ip85 tolas=Rs. 23,000 (approximately) 
at the price proposed to be fixed). The device of the sale 
of Savings Certificates was therefore, recommended by the 
Commission for bringing home to the people the change 
in the previous system. The conditions laid down for the sale 
of gold were such that gold would not be demanded by the 
people from the currency authority at all. Owing to certain 
difficulties pointed out by the Commission, 1 gold currency 
standard could not be adopted forthwith. Under the 
circumstances, the gold bullion standard though not conform- 
ing to the proper definition of gold bullion standard 2 was 
not an unsatisfactory system to be adopted and worked. 


The Hilton Young Commission found unsatisfactory the 
existing system of monetary control under which the 
Government controlled the currency and the credit was 
controlled, in as far as it was controlled at all, by the 
Imperial Bank. This divided control of currency and credit 
prevented co-ordination of currency and credit policies. It 
also kept the banking and currency reserves of the country 
separate, thus diminishing their capacity to be used in the 
most effective manner for the stabilisation of exchange. 

1 The most important being the opposition of Great Britain and 
U. S. A. 

1 See B. R. Shenoy's article in The Indian Journal of Economics, 
October, 1933. 


To bring about unity of policy in the control oi currency 
and credit, the Commission recommended the establishment 
of a central bank, to be called the " Reserve Bank of India". 
It was to be a shareholders' Bank with a capital of Rs- 5 
crores. Its management was to be conducted by a Central 
Board consisting of fourteen members of whom five 
(including the Managing Governor and Deputy Managing 
Governor) were to be nominated by the Governor-General- 
in-Councii To eliminate the danger of any political 
influence, no member of Governor General's Council, 
Provincial Governments and Central and Provincial Legis- 
latures was to be appointed President or Vice-President of 
a local Board of the Bank or nominated as a member of the 
Central Board. The representatives of the commercial 
banks were to be ineligible in the same manner. 

The proposed Reserve Bank of India was to perform all 
the functions of a central bank. It was to make and issue 
bank notes, receive deposits from and collect money for 
Central and Provincial Governments, banks and bankers 
and gi^ve loans to and make remittances on behalf of the 
Central and Provincial Governments. It was to maintain 
the external and internal stability of purchasing power of 
the rupee. It was to buy and sell gold at a fixed rate in 
quantities of not less than 400 ozs. By taking over the 
remittance operations of the Government, the bank was to 
displace the Government from the Exchange market. It 
was to take over the management of Gold Standard 
Reserve and Paper Currency Reserve (which were to be 
amalgamated into one) and pay a share of its profits to 
the Government of India. Finally, it was to act as bankers' 

The Reserve Bank of India was thus to be the monetary 
authority to work the gold bullion standard recommended 
by the Commission. 

The Commission were against entrusting Central 
banking functions to the Imperial Bank of India which in 
their opinion had useful work to do in extending commercial 
banking facilities in the country. Sir Purshotamdas 
Thakurdas who wrote the Minute of Dissent held, however, 
that the Imperial Bank would not be hindered in its 
commercial business if it was entrusted with central banking 


functions. He thought that proposed Reserve Bank would 
be a rival institution to the Imperial Bank and recommend- 
ed the evolution of the Central Bank from the Imperial 
Bank. If, however, the shareholders of the Imperial Bank 
were opposed to their rights being restricted in the matter 
of getting their dividends, there would be, he said, " no 
alternative left but to start a new Central Bank' 1 - 


The Hilton Young Commission considered the time fully 
ripe for the stabilisation of the rupee and recommended 
that the rupee be stabilised forthwith in relation to g^ld at 
a rate corresponding to an exchange rate of Is. 6d- for the 
rupee- The value of the rupee, they said, should be fixed 
in terms of gold and the rupee should be equivalent to 
8"47512 grains of fine gold. 1 

The Commission pointed out the advantages of adopting 
Is. 6d. ratio as well as the disadvantages of reverting to the 
pre-war Is. 4d. ratio. The arguments given by the Com- 
mission in favour of Is. 6d. ratio have been set down below. 

L At the existing (Is. 6c/.) ratio, 2 prices in^India "have 
attained a substantial measure of adjustment with world 
prices and any change in the rate would mean a difficult 
period of readjustment, involving widespread economic 
disturbance". Since June 1925, exchange had been steady 
and the rupee prices and world prices had been falling to- 
gether, showing that adjustment between exchange and 
prices had taken place. This conclusion was further confirm- 
ed by the absence of any adverse reaction on Indian trade. 

2. Wages also have adjusted themselves to the prices 
at the existing exchange rate of Is. 6d. Though there is 
depression in jute industry and cotton mill industry, it is 
due to causes which the manipulation of exchange rate can- 
not remedy. 

3. As regards contracts, least injury will be caused by 
adhering to Is, 6d. ratio. It is true that land revenue and 
other long term contracts were settled when the ratio was 

1 One gold pound contains 113.00 16 grains of fine gold. 874512 grs ; 
SB 3/40 of gold pound =ls. 6d. (gold). 

1 The exchange rate had been Is. 6d. (gold) since June 1925, 


Is. 4<f. f but owing to the rise of prices since 1914, the 
incidence of land revenue as calculated in terms of com- 
modities has become lighter. The contracts concluded 
after 1918 could not have been on the basis of Is. 4d. rate 
which was effective only for a very short period after 1918. 
As most of the contracts must be short term contracts, least 
injury would be done by adopting Is. 6d. ratio. 

The Commission gave the following arguments against 
reverting to Is. 4d. ratio. 

1. Though Is. 4d. rate has been called the 'natural' 
rate, it is difficult to understand in what sense it can be so 
described. If the Indian exchange were left to itself, there 
would be wide fluctuations in it and it would be impossible 
to find out the 'natural' rate- 

2. Is. 4d. rate would not be easier to maintain in times 
of adverse balance of trade, as has been argued by its 
supporters. 1 If the reserves are adequate as they would be, 
Is. 6d. ratio can be made as effective as Is. 4d. ratio- 

It has been suggested that the stabilisation of the rupee 
at 15. 4d. (Rs. 15 = one pound gold) will raise the price 
of gold and Aeck the abnormal import of gold into India 
for being hoarded- But the import of gold is due to causes 
(such as the people's appetite for gold) which cannot be 
removed merely by adopting a lower ratio. 

4. It is argued that if world prices fall in future, Is. 4d. 
rate will cause less rapid fall in Indian prices than Is. 6d. 
rate. But any abnormal price fall in future is not expected 
and any prolonged fall in prices will react on Indian price 
level whether the rate is Is. 4d. or Is. 6d. 

5. Is- 4d. rate was not effective from 1917 to 1925 and 
it cannot be contended that there has been an adjustment 
of prices and wages to that ratio. As there has been no 
such adjustment to Is. 4d. rate, the fixing of this rate will 
lead to profound disturbance in economic conditions. It 
will lead to a rise in prices, causing hardship to consumers 

*The argument probably was that at Is. 4d. ratio, less of gold would 
have to be given out of the reserves in return for a rupee when the 
internal currency was converted into gold. 


and wage-earners. It may also by raising cost of living lead 
to a demand for higher wages and salaries. 

6. The reversion to Is. 4d. ratio will upset the finances 
of the Government of India. Increased taxation may become 
necessary to meet the sterling obligations of the Govern- 
ment. If the budgetary equilibrium is upset, the credit of 
India as regards borrowing may also be impaired. 

The Minute of Dissent 

Sir Purshotamdas Thakurdas dissented from the con- 
clusions and recommendations of his colleagues in favour 
of 15. 6d. ratio. His arguments against Is. 6d. rate have 
been summarised below. 

L The Government of India had been aiming at 15. 
6d. rate and, therefore, instead of stabilising the ratio at 
15. 4d. gold in September 1924, as they ought to have done, 
they contracted currency, or unduly limited its expansion, 
to push up the value of the rupee to Is. 6d. Is. 6d> rate had 
thus been secured by currency manipulation and was not a 
"natural" rate- 

2. There had been no adjustment of Indian prices 
since the rupee touched Is. 6d. gold in June 1925. Though 
Indian prices had fallen since June 1925, the fall had been 
in response to a fall in world prices and not due to an 
adjustment of ? rupee prices to the higher (Is. 6d.) rate. 
The full adjustment of rupee prices to Is. 6d- rate was yet 
to come- If world prices fall lower as is pxpected, the fall 
in Indian prices would be accentuated because, besides 
the adjustment already due, further adjustment would 
become necessary. This heavy fall in prices will hit Indian 
producers very haid. 

3. The: e had been no adjustment of wages to Is. 6d. 
ratio and such adjustment if it has to be enforced by lower- 
ing wages, "will entail a long and bitter struggle between 
Labour and Capital, with consequent disturbance in the 
economic organisation of the country." 

4. Until wages get adjusted to Is. 6d. rate which 
will involve a long and painful process the foreign manu- 



facturers will enjoy a bounty of 12J per cent. 1 This indirect 
help to the foreign manufacturers will intensify competition 
with Indian industries, 

5. It has been argued that Is. 6d. rate has had no 
adverse influence on Indian trade. In respect of exports, 
the absence of adverse influence is due not to the suitability 
of the rate but to successive good harvests and the low 
holding power of the Indian agriculturist (who must sell 
and export his produce in any case). As regards imports 
there has been slackness in the demand for imports an 
indication of lower purchasing power of the masses and 
it is due to Is. 6d- rate. 

6. The adoption of 15. 6d. rate will be injurious to the 
debtor class. There is no justification for imposing an 
additional burden on a class already overburdened. 

Sir Purshotamdas Thakurdas rested his cose for reversion 
to Is. 4d. rate on the following arguments : 

1. Is. 4d. rate had been in force for about 20 years and it 
should not be changed unless it is absolutely unmaintainable 
or unattainable. 

2. It will have no adverse influence on Indian finances 
because the loss in sterling remittances will be made up in 
other directions. In any case, the gain in respect of sterling 
remittances obtained from Is. 6d. ratio will be at the ex- 
pense of the producer who will have to accept fewer rupees 
for the produce he has to sell. 

3* It will cause no hardship to those whose contracts 
were entered into before 1917 and they include the vast 
mass of Indian agriculturists whose interests deserve full 

4. The adoption of Is. 4d. rate will appreciably diminish 
the risk of a depletion of the reserves in times of an adverse 
balance of trade- 

5.' No other country, even in the most prosperous 
circumstances, has considered it just or advisable to adopt 
a rate of exchange higher than its pre-war rate- India also 
should revert to pre-war rate and thus establish public 
confidence in its currency system. 

*At Is. 4d. rate, a foreign article selling for Rs. 15 in the Indian 
market will give to the foreign manufacturer one pound. At 1$, 6d. 
rate, the same article worth Rs. 15 will give him 12\ per cent more. 


Sir Purshotamdas Thakurdas having ably put forward his 
case in favour of Is. 4d. concluded on a note* of apprehen- 
sion saying that if Is. 6d. ratio was accepted, " India will be 
faced during the next few years with a disturbance in her 
economic organisation the magnitude of which it is difficult 
to estimate but the consequences of which may prove 
disastrous. " 


The publication of the Commission's report in 1926 gave 
rise to strong controversy which centred for the most part 
round Is. 6d. ratio. Steps were taken by the Government 
to give effect to all the three main recommendations of the 

In January 1927, the Government introduced the " Gold 
Standard and Reserve Bank of India " Bill to give effect to 
the recommendations relating to the adoption of gold bullion 
standard and the establishment of the Reserve Bank of 
India- The Bill was referred to a Select Committee. There 
was a stout opposition by a majority in the Committee to 
the main features of the scheme incorporated in the Bill, 
that is, to the bank being a shareholders 1 bank and to the 
exclusion of members of legislature from its directorate. 
The majority of the Select Committee also wanted an 
Indian as the Governor or Deputy Governor of the Bank 
and recommended the coinage of gold mohars. Owing to 
differences between the Government and the opposition 
particularly on the question of directorate, the Bill was 
dropped finally in February 1928. So neither the Reserve 
Bank of India could be established nor gold bullion standard 

To give effect to the Commission's recommendations re- 
lating to the stabilisation of Is. 6d- ratio, the Currency Act 
of 1927 was passed. The Act established Is. 6d. (gold) ratio 1 
by imposing statutory obligation on the Government (1) to 
purchase gold at Rs. 21-3-10 per tola in the form of bars 
containing not less than 40 tolas (15 ozs.) of gold and (2) to 
sell gold for delivery at Bombay or sterling for delivery in 

1 An amendment to fir the ratio at Is. 4d. was lost in the Indian 
Legislative Assembly by 65 votes against 68. 


London in amounts of not less than 1,065 tolas (400 ozs.) 
of fine gold (or the equivalent amount of sterling). The 
Controller of Currency had the option to sell sovereigns 1 
but an obligation was placed on the Government to receive 
them at Currency Offices and Treasuries at their bullion 
value at the rate of 8*47512 grains of gold : Re. 

The Act did not at all introduce gold bullion standard 
because the Government retained and actually exercised the 
option of selling, in return for internal currency, sterling 
for delivery in London. Strictly speaking, therefore, the 
standard adopted was sterling exchange standard. But so 
long as sterling was convertible into gold (as it was upto 
September 21, 1931) the standard was actually gold 
exchange standard. In a way, therefore, gold exchange 
standard, criticised and discarded by the Hilton Young 
Commission, was resumed. 

Seepage 58, footnote 1. 

VII Period: 1927 September 1931 



From 1st April 1927, when the Currency Act of 1927 was 
brought into force to September 1929, trade conditions in 
India were generally favourable, both exports and imports 
registering a rise. 

Value of merchandise (including Government Stores) 
(In crores of rupees) 

1926-27 1927-28 1928-29 1929-30 1930-31 

Exports 311 330 339 319 226 

Imports 241 261 263 250 173 

Total value 552 591 602 569 399 

The total value of exports and imports in the three 
previous years i.e., 1923-24, 1924-25 and 1925-26 was 600, 
653 and 623 crores of rupees respectively. 1 The improve- 
ment in trade need not be attributed to the stabilization of 
15. 6d. ratio ; it might have been in a large measure the 
counterpart of much greater improvement in world trade. 
Perhaps a lower ratio would have communicated that 
improvement to Indian trade in greater measure. 

1 As prices of the articles of export and import vary from year to 
year, the course of trade is better shown by the following table made on 
the basis of declared values in 1913-14^ 

Values of exports and imports on the b'ists of declared values in 1913-14 
(In crores of Rs.) 

Total value 





























The Calcutta Index Number of prices, however, showed 
a noteworthy decline : 

July 1914-100 

Year Index No. 

1926 148 

1927 148 

1928 145 

1929 141 

The exchange, in spite of temporary recovery now and 
then, 1 showed signs of weakness for the most part of this 
period. The measures taken by the Government to 
strengthen it were : 

(0 Raising the rate at which it was prepared to lend 
emergency currency to the Imperial Bank of India. 

00 Sales of treasury bills in large amounts to prevent 
the outflow of funds. 

(m) Contraction of currency. 


After September 1929, India became involved in the 
world trade depression a depression unprecedented in 
magnitude and intensity. The prices of both agricultural 
and munufactured goods began to fall, but the decline in 
agricultural prices was much heavier. 2 Indian exports, 
therefore, received a severe setback. The Indian exchangf 
became definitely weak and the Civil Disobedience move- 
ment started in 1930 weakened it further by paralysing 
trade and industrial production and causing a flight of 
capital from India. 

1 It was strong from December 1927 to February 1928 -and during 
October and November 1928. 

1 From September J 929 to September 1931, the prices of exported 
articles fell by about 46 per cent and of imported articles by only 17 
per cent. 


The Government issued Treasury Bills in large a'mounts 
and contracted currency by selling sterling 1 and meeting 
these sales by transfers from the Gold Standard Reserve 
and Paper Currency Reserve to the Treasury balances of 
the Secretary of State. 

The measures taken fey the Government to maintain 
Is. 6d. ratio created stringency in the money market 2 and 
accentuated the fall in prices. Strong protests against them 
were made by Indian commercial interests. 


During the twenty years that fell between the two wars, 
the ratio question dominated Indian monetary thought 
almost continuously. At times it began to appear as if the 
economic system of India was suffering from the cancer of 
a wrong ratio which was leading by painful degrees to a 
state of complete collapse Both the proponents and 
opponents of is. 6d. hotly pursued their arguments during 
the fateful years of 1925-27. For a year or two after the 
legalisation of Is. 6d< ratio in 1927, the controversy appeared 
to subside but the onset of depression released a fresh spate 
of accusations, arguments and counter-arguments. After 
the eventful year of 1931, the ratio controversy grew livelier 
still, though it changed somewhat in form. It will be con- 
venient to review briefly the main issues of the 
controversy upto 1931 at this stage and defer their exami- 
nation subsequent to that date to the next chapter. 

A careful perusal of the available contemporary 
accounts of the ratio controversy shows that the criticism 
of Government's exchange policy after the 1920 episode 
was directed mainly along two lines. The first line of 
criticism was that the Government did not avail themselves 
of the opportunities that, came in and after September 1924 

1 From June to September 1931, Reverse Councils worth 14 
millions were sold. From 1926-27 to September 1931, currency of about 
Rs. 138 J- crores was withdrawn from circulation. 

2 The financial year 1928-29 opened with 7 per cent bank rate. After 
-a drop of 2 per cent by November 1928 it rose to 7 per cent In December 
1928. and to 8 per cent in February 1920. (Seethe article by J. C. and 
H. Sinha in the Sankhya, December 1929). 


to stabilise the rate at Is. 4d- The contention here was 
that Government did not intend to fix the rate at Is. 4d. 
and wanted to leave the question open. The unwillingness 
of the Government to remove the dead and ineffective ratio 
of 2s- from the statute book was cited in support of his 
contention It is necessary in this, connection to recount a 
few events in chronological order- In January 1921, Sir 
Vithaldas Thackersey moved a resolution in the Central 
Legislature asking for a revision of 2s. ratio but the resolu- 
tion was opposed by the Government and was lost * In 
September 1924, a suggestion was made in the Legislative 
Assembly for the stabilisation of the ratio at Is. 4d. (gold) 
but it was opposed bythe Government. 2 In January 1925 
the Assembly passed a resolution recommending the ap- 
pointment of a Committee with a majority of Indian non- 
officials on it and with an Indian chairman to examine the 
whole question of exchange and currency. In February 1925 
two Bills were introduced by Sir Purshotamdas Thakur- 
das to amend the Indian Coinage Act, 1906 and Indian 
Paper Currency Act, 1923, the common purpose of the two 
Bills being the fixation of the rate at Is. 4d. gold. 3 It would 
appear from this that the Government did not wish to fix 
the value of the rupee at Is. 4d. gold or any other rate but 
wanted to wait until the economic and monetary situation 
had become sufficiently clear to enable them to make up 

their mind. They must have been naturally watching the 
developments in England where through a steady deflation- 
ary process the old gold parity of the pound was being 
gradually approximated to and they might have been 
reluctant to commit themselves to any course of action in 
advance. The second line of criticism of Government's 
exchange policy was that the Government deliberately 
raised the ratio from Is. 6d. sterling (Is. 4d. gold) to Is. 6d. 
gold by resorting to considerable deflation between June 
1924 and February 1926. It was contended that the 
Government manipulated the currency with a view to 
presenting the Hilton Houng Commission, when it met, with 

1 Sir Purshotamdas Thakutdas's speech; Leg. Ass. Debates, 1927. 
Vol. 2, p, 1797. 

1 Leg. Ass. Debates, 1924, Vol. 4, pp. 3808-12. 

8 Leg. Asa. Debates, 1925, Vol. 5, Pt, 1, pp. 715 and 719) 


a fait accompli. 1 In defence of the Government's policy it 
was argued that "currency requirements naturally contracted 
with the fall in prices " and '* the Government would have 
failed in their duty if they had not acted accordingly to pre- 
vent any risks to stability arising out of the existence of a 
surplus of currency in circulation "* 

But after Is- 6d> ratio had been attained, no matter how, 
the important issue was whether it was the 'natural 1 or the 
correct ratio. And correct ratio was defined as one to 
which prices, wages and cost of living had adjusted them- 
selves. During 1926-27, therefore, the really vital part of 
ratio debate became co-extensive with the arguments to 
prove or disprove that adjustment between Is, 6d. ratio, on 
the one hand, and prices, wages etc- on the other, had 
already taken place. For, if it could be proved that the 
adjustment had already taken place, the case for maintaining 
and legalising Is. 6d. ratio would be the strongest and the 
adoption of any other ratio could be shown to be highly 
disturbing and dislocating. A lower ratio like ls> 4d. would 
involve inflation of currency, rise in prices, a rise in worker's 
cost of living and, if his money wages remained the same, 
a concealed cut in his wages. But if adjustment was yet to 
take place and it could plausibly be argued that the 
process of adjustment was long and protracted in a country 
like India then the reversion to Is. 4d. ratio was not only 
not fraught with any evil consequences but was necessary 
and desirable in order to prevent the serious effects that 
Is 6d. ratio might drag in its trail. The maintenance of a 
higher ratio to which prices had not yet adjusted them- 
selves would, in that case, involve deflation, monetary 
stringency, fall in prices and disastrous repercussions on 
India's export industries, particularly agriculture, The 
bearing of the ratio on the Government of India budget was 
also a material consideration, at least from the official 
standpoint and while presenting the Budget for 1927-28, the 
Finance Member, Sir Basil Blackett, estimated the loss to 

1 See the Telegraphic Correspondence between Government of 
India and Secretary of State, Hilton Young Commission's Report 
Appendix 98. Also Leg. Ass. Debates, 1927, Vol. 2, pp. 1859-60. 

2 Sir Basil Blackett's speech at Delhi University on November 23 


the Government that a reversion to 15. 6d. ratio would 
cause at Rs. 5'26 crores. 1 

Though the comparative merits of stability of exchange 
and stability of internal prices were never made a prominent 
issue in the ratio discussions, it is interesting to find that a 
choice between the two was implicit in whatever position 
was taken by the participants. Those who began to urge on 
the government the advisability of stabilising exchange from 
1924 onwards i.e., in an admittedly unstable world were 
unconsciously showing a preference for exchange stability. 
On the other hand, the Government by allowing the 
exchange to rise and fall whether by folly, helplessness or 
design contributed in an unpremeditated way towards the 
maintenance of internal price stability. The debate on the 
ratio in 1926-27 would perhaps have been conducted on a 
higher plane and to better purpose if the necessity of flexi- 
bility in exchange and the importance of the internal 
stability of prices had been brought out as the crucial points. 

Examining the ratio controversy in retrospect, it seems 
that the opponents of Is. 6d had batter judgement on their 
side. It is true that there can be no such thing as "natural'' 
ratio because given a certain amount of deflation, or infla- 
tion, any ratio can be accomplished for the time being and 
the internal price level will get adjusted to such a ratio. The 
argument for Is. 4d. that it was the " natural" rate was 
meaningless. Nor should the case for Is. 4d. have rested 
on its being the pre-war parity, for the decision to adopt a 
particular ratio has to be made with reference to the 
prevailing facts as regards prices, trade conditions, wages, 
etc- The economic conditions prevailing in India from 
1927 to 1931 furnish no evidence that 15. 6d. rate contribut- 
ed to stability and progress. The two years 1927-28 and 
1928-29 were no doubt years of comparative stability and 
expansion of trade. It is probable,, however, that the 
stability or trade expansion was secured in spite of Is. 6d. 
ratio. It was the Indian counterpart of increasing world 
stability and expansion of world trade. When the down- 
ward trend of prices and trade began, Is. 6d. rate, which 

l L?g Ass. Debates, 1927, Vol, 2, p, 1464. When, however, Mr. 
T. Gavin-Jones pertinently asked if the Government had gained an equal 
amount by a rise in ratio to Is. 6d, the Finance Member gave a flat but 
unconvincing denial (Ibid., 1881.) 


itself was never firm in the saddle, accentuated their fall in 
India. The Government refused to accept such view. 1 

The following graph based on the average of the daily 
telegraphic transfer rates from Calcutta on London shows 
exchange fluctuations from year to year : 

9920-21 2f*22 

i Sarda* Sant Singh asked in tie Legislative " Assembly on 
September 9, 1931 for a statement on the loss caused to India by fall in 
prices due to action of Government of India in maintaining exchange at 
Is. 6d. 

Sir George Schuster replied ; ** I regret I do not understand the 
question. The fall in prices has been due not to the maintenance of 
exchange at Is. 6d> but to the general world causes. II for example, 
exchange had been fixed atl$.4d. in 1927, India would have felt the 
full shock of the fall in world prices for all her main commodities just 
as much as she is feeling it now, The percentage fall would have been 
the same '.Legislative Assembly Debate*. 193.1, Vol. V, pp. 108-09. 

VIII Period : September 1931 August 1939 


On September 21, 1931, the British Government in con- 
sultation with the Governing Body of the Bank of England 
suspended sub-section (if) of Section I of the Gold Standard 
Act of 1925. This sub-section laid an obligation on the 
Bank of England to give gold bars in exchange for internal 
currency. When this obligation was removed, sterling was 
divorced from gold and EngUnd was off the gold standard. 
Sterling, no longer convertible into gold, began to depre- 
ciate steadily in relation to it- It is not possible here to go 
into the causes of abandonment of the gold standard by 
England- Nor is if very necessary to do this to understand 
the reaction of that event on the Indian currency system. 

The rupee was linked to sterling by the Currency Act of 
1927 at the rate of Is. 6d. but so long as sterling was con- 
vertible into gold the rupee was virtually on a gold basis. 
Now when sterling had no longer a fixed relation to gold 
the Government of India had to decide about the basis and 
the rate of the rupee afresh- Five alternative courses were 
open to them : 

CO To link the rupee to sterling at Is. 6d. i.e., to main- 
tain the statutory obligation laid on the Government of 
India to sell sterling in exchange for internal currency at 
1*. 6d. : Re. *' 

00 To link the rupee to gold at Is- 6d- rate i.e., to make 
the rupee convertible into gold at one rupee=8'47512 grains 
of gold. 

(m) To link the rupee to gold at a rate lower than 
Is. 6d. 

(n>) To link the rupee to sterling at a rate lower than 
15. 6d. 

(v) To leave the rupee free i.e. to link it neither to gold 
nor to sterling but to allow its exchange value to fluctuate 
according to its purchasing power relatively to that of other 


currencies and to other market influences. This implied, 
of course, a kind of controlled inflation because left com- 
pletely to itself, the exchange value of the rupee would fall 
to its bullion value. 

, Of thesfc, the Government ultimately chose the first 
course. As soon as England went off the gold standard, the 
Governor-General-in-Council issued an Ordinance (No- VI 
of 1931) removing the obligation placed on the Government 
by the Currency Act of 1927 to sell gold or sterling 1 . The 
position thus created was that the rupee was delinked from 
both gold and sterling 1 . Three bank holidays were declared 
presumably to prevent a run on the banks by the public in 
an unreasoning fear. 

A third event of outstanding importance which occurred 
on the same day i-e , the 21st September 1931, was that the 
Secretary of State for India made a statement before the 
Federal Structure Sub-Committee of the Indian Round 
Table Conference informing them that it had been decided 
41 to maintain the present standard on sterling basis." 

On 24th September 1931, therefore, Ordinance VI was 
repealed and another Ordinance (No. VII of 1931) 3 was 
passed- This Ordinance restricted sales of gold or sterling 
to genuine trade purposes and reasonable personal require- 
ments. The rules made under the Ordinance laid down 
25,000 as the maximum amount of gold or sterling to be 
sold to any recognised bank and empowered a Managing 
Governor of the Imperial Bank to call upon any recognised 
bank to satisfy him that it was purchasing gold or sterling 
only for purposes permitted under the Ordinance- 4 The 

The purchase of gold at the Mint was, however, not stopped. 

2 Mr. Arthur Moore asked in the Legislative Assembly on 21st Sep- 
tember, 1931 if steps would be taken to link the rupee with sterling 
during the period when it might be temporarily divorced from gold. Sir 
George Schuster replied that they had not had time to settle their de- 
tailed plans. (Legislative Assembly Debates, 1931, Vol. V, page 714). 

8 The Gold and Sterling Sales Regulation Ordinance, 1931. 

4 This does not mean that sales of gold were provided for by the 
Ordinance or a link with gold established. The position was that the 
Ordinance modified the Currency Act ot 1927- The option of the 
Currency authority to sell gold or sterling remained but the amount of 
gold or sterling was restricted to 25,000. When the Ordinance was 
cancelled on 3Cth January 1932, the Currency Act of 1927 came into force 


object underlying all these restrictions was to maintain the 
sterling value of the rupee at Is. 6d. In the absence of 
such restrictions, it was feared, rupee would seek conversion 
into foreign currencies in large quantities, causing weakness 
in exchange- 1 

* The action of the Government in linking the rupee to 
sterling was probably the best under the circumstances but 
it led to a good deal of criticism partly because it was 
taken without consulting the Indian Legislature or public 
opinion but largely because the old ratio was maintained. 
The ratio question has been discussed in another chapter. 
As for linking the rupee to sterling, was any other course 
of action feasible ? 

The alternatives to a link with sterling were a link with 
gold and a kt free " rupee. If the rupee had been linked to 
gold at Is. 6d. or Is. 4d. rate (i e., made equal to 8'47 or 7'53 
grains of gold), strong gold reserves would have been 
necessary to maintain the link. But at that time, the gold 
portion of the Paper Currency Reserve was very low and 
the gold stock amounted to 32| millions sterlirig( sterling 
on its previous parity). 2 To maintain the convertibility of 
the rupee into gold at a time when there was a rush for 
gold in other countries, deflation might have become 
necessary. Besides, a fixed ratio in terms of gold would 
have meant a fluctuating ratio in terms of sterling so long as 
sterling depreciated in relation to gold. A fluctuating 
sterling rate would have reacted adversely on India's trade 
not only with Great Britain but also those countries which 
had linked their currencies to sterling. If Is. 6d- sterling 

The Government of India^have had to take into ac- 
count the possibility that in present conditions of uncertainty as to the 
international position, there might be an inducement to speculators to 
take advantage of unlimited facilities offered by the Government to 
'acquire sterling exchange and that might operate to the detriment of 
genuine traders and of public inteiest." Sir George Schuster's statement 
in the Legislative Assembly. 

" In Bombay, in the first ten minutes after business opened and 
before the markets were aware of the issue of the Ordinance, demands for 
, 25,000 pounds sterling were received," Sir George Schuster's reply ; 
Legislative Assembly Debates, 1931. 

2 Sir George Schuster's statement in the Legislative Assembly on 
24th September, 1931. 


rate was regarded as unduly high for India, Is. 6d. gold rate 
(which meant much more than Is. 6d. sterling) would have 
been still more objectionable- 

A 4 ' free " rupee the other alternative course implied 
some kind of controlled inflation. It might have meant 
somewhat unstable exchange but in any case it involved 
greater currency control with some definite object or 
objects in view e.g., raising or maintaining the internal price 
level in parity with cost. Such control requires initiative, 
foresight and boldness of action and does not offer the 
advantage of comparative stability. The Government, how- 
ever, wanted primarily an anchor for the rupee so that in 
paying off sterling loans and meeting other sterling obliga- 
tions they might be relieved of the inconveniences and risks 
of an unstable exchange. 

The linking of the rupee to sterling tied the rupee to the 
chariot wheels of depreciating sterling. In relation to gold 
or currencies based on gold, it depreciated along with 
sterling. The depreciation of the rupee raised Indian prices 
and tended to stimulate exports to countries having curren- 
cies based on gold and to discourage imports from them. 1 
In actual fact, the stimulus to exports was in large part 
neutralised by declining world prices and high import duties 
and other restrictions imposed by most f such countries. 
As for imports from these countries, they became dearer in 
the Indian market and the British goods obtained an ad- 
vantage in competition a sort of preference by the back 
door- The advantage or preference was not enjoyed for 
long because other countries too either went off gold or 
devalued their currencies one by one. It may be added 
1 An example would make this clear. If befoie England uent elf 
the gold standard, one u as equal to 4'86 dollars (gold), an American 
commodity worth 4'86 dollars could be purchased for me or Rs. 33-5-4 
(ar Is. 6d, rate), After England went off the gold standard, the pound 
sterling or paper pound was no longer equivalent to 486 dollars (gold), 
it became owing to depreciaticn equivalent to, let us say 4'25 dollars 
(gold). In other words, to purchase the same American commodity' 
worth 4*86 dollars gold, more than one pound sterling had to be paid and 
since the rupee was linked to sreiling at the old ratio, more than 
Rs. 13-5-4 had to be paid. And for an Indian commodity selling tor 4'8b 
dollars more than Rs. 13-5-4 were received. 


here that this advantage would have accrued to Great 
Britain even if the rupee had been linked to gold. 

The stabilisation of the rupee in terms of sterling en- 
abled the Government to meet its sterling obligations with- 
out embarrassment or uncertainty and led to marked im- 
provement in India's credit. 

The most important and probably the most far-reaching 
effect of linking the rupee to sterling was the export of gold 
from India in enormous quantities. The Government did 
not interfere with the export of gold which went on un- 
checked. An embargo or a high duty on gold exports or 
the purchise of gold by the Government was vehemently 
urged by those who considered export of gold injurious to 
the country. 1 The Government did not take this view and 
took no action and have taken none so far. The issues 
raised by gold experts are important and hav been discus- 
sed below ( 2). Only this need be mentioned here that 
the gold exports strengthened the exchange rate which 
consequently showed a tendency to rise above Is. 6d. At 
a time when export of merchandise had fallen and the 
balance of trade in merchandise had shrunk greatly, the 
gold export created a large balance of trade in favour of 
India. The exchange became firm and during the next 4 or 
5 years remained at a premium except for very brief 


After England went oft the gold standard on September 
21, 1931, and the rupee ratio was fixed in terms of sterling at 
Is. 6d-, the price of gold rose from about Rs. 21 per tola to 
Rs. 25 and in December 1931 stood above Rs. 30. At the 
same time export of gold from India commenced on a large 
scale and has continued ever since though in progressively 
decreasing amounts.* The quantity and value of gold ex- 
ported and the average price of gold are given on the next 


* l The Federation of the Indian Chambers of Commerce and Industry 
passed on the 26th March 1932, a resolution strongly urging on the Gov- 
ernment of India the desirability of placing an immediate embargo on 
the export of gold from India and the necessity of purchasing gold in the 
open market. 

1 It increased somewhat in 1939-40. 


Net amount of Value (crores Average price 

exported gold of rupees) of gold per 

(millions of fine tola (in 

02 ) rupees)* 

1931-32 ... 773 57'98 25-9-0 

1932-33 ... 8*35 65' 52 30-9-0 

1933-34 ... 670 57*05 33-4-0 

1934-35 ... 5-69 52'54 357-0 

1935-36... 402 37*36 35-8-0 

1936-37 ... 3*01 2785 35-10-0 

1937-38 ... 177 16'33 36-1-0 

3938-39 ... 1-35 13'05 37-12-0 

1939-40... 3-16 3467 , 41-14-0 

The issues raised by gold exports may be discussed 
under the following heading :- 

1. The relation between gold exports and the linking 
of the rupee to sterling at Is. 6d. rate- 

2. The relative influence of economic distress and rise 
in the price of gold in causing gold exports. 

3. The possible effect on gold exports of the adoption 
of an alternative course, say, linking the rupee to gold. 

4. The economic implications of gold exports and of 
the measures that might have been taken to check them- 

Owing to the economic distress caused by the heavy fall 
in agricultural prices during 1930-31 and possibly intensified 
by Is. 6d. ratio, gold had begun to be sold by the people in 
rural areas much before England went off the gold standard. 
Mr. (now Sir) M. L. Darling, the Registrar of Co-operative 
Societies, Punjab who undertook a tour of the Punjab villages 
in the cold weather of 1930-31 found gold being sold to meet 
Government dues. "The following summer ", he says, ''the 
market price of wheat having fallen to Re. 1-6-0 a maund, 
sale in canal irrigated tracts became very brisk ...Even when 
the price of gold rose 50 per cent, nearly all the gold that came 
upon the market from the village- and most of it came from 
this source was distress gold, and those who were not oblig- 
ed to sell, for instance, the larger land-owners, did not do so- 
In the town, too, it is only the very modern minded who are 

* Statistical Abstract for British India ; 1930-31 to 1939-40. 


prepared to part with their ornaments for any -other 
reason but necessity. 1 ' 1 

Another enquiry undertaken by the Punjab Board of 
Economic Enquiry in 120 Punjab villages also showed that 
the sales of gold were due to stern pressure of economic 

necessity. 2 No such information about other Provinces is 
available but it appears that upto September 1931 at least, 
gold was sold mostly out of necessity. A largs part of it 
went ultimately into the hands of bullion dealers in the 
cities but a good deal was acquired by the Government 
also. 3 

Two questions at once arise : Why did the price of 
gold rise ? Why was gold exported ? The price of gold 
in terms of rupees rose because sterling was depreciating 
in relation to gold and as the rupee was chained to sterling, 
it, tt>o, depreciated. In other words as more sterling had to 
be given to get the same amount of gold, more rupees had 
also to be given- 4 The depreciation of sterling in relation 
to gold could be measured by its depreciation in relation 
to a currency still based on gold i e., dollar or franc. The 
rupee price of gold, therefore, varied with fluctuations in 
sterling-dollar rate and later, in sterling-franc rate. 

It may be pointed out that even if the rupee had not 
been linked to sterling but left free, the. price of gold in 
terms of rupees would have risen. The rupee would have 
depreciated in relation to gold and the rupee price of gold 
risen. Only if the Government had linked the rupee to 

*M. L. Darling: Wisdom and Waste in the Punjab villager, pp. 320-21. 
*Note on the sales of gold and ornaments in the Punjab villages. Chapter 

IV * 'There is amass of evidence com ing from all parts of the Province 
to bear out the conclusion that necessity and economic pressure were 
the predominant forces behind the larger part of the sale of gold". P. 10. 

8 Although we have lost a certain amount of our Currency 

Reserve in the last two months, we have riot lost a single penny of our gold 

reserves and our actual gold reserves stand at about 7 millions 

sterling higher than they did an year ago, owing to the receipts of gold 
from up-country" Sir George Schuster, Legislative Assembly Debates, 
September, 2931. 

4 A small example would make this clear. Suppose, on 19th Septem- 
ber, one pound sterling was equal to 113 grains of gold. On 25th Septem- 
ber, owing to depreciation of sterling 1J pound sterling, let us say, became 
equal to 113 grains of gold. If the sterling ratio of the rupee remains the 
same*, e., Is. 6d.< Ra. 13-5-4 will pur chase 113 grains of gold on the first 
date and Rs. 16-10-8 the same amount of gold on the second. 


gold at a definite rate, such a rise could have been avoided. 
A rise in the rupee price of gold naturally created a 
strong inducement for the people to sell gold. Those who 
were forced by economic necessity parted with it more 
freely and others who wanted to take advantage of its high 
price began to convert their gold hoards into productive 
investments such as deposits in banks, purchase of land etc. 
In both the cases the rise in the rupee price of gold 'brought 
gold out of the hoards in big amounts- How much of this 
gold was ** distress gold" and how much "investment gold 1 * 
must, however, remain very much a matter of conjecture. 

The export of gold as distinct from its sale within the 
country was, however, due not to a rise in its price but to 
the difference between the sterling price and rupee price of 
gold. The sterling price being higher, the bullion dealers 
found it profitable to export gold- The fixed ratio of Is. 6d. 
sterling helped this outflow of gold by keeping up this 
margin of profit while a rising exchange ratio would have 
extinguished it by bringing the bullion dealers less rupees 
in return for the sterling obtained for gold sold. 

The exchange left to itself might have risen in response 
to the stimulus of gold exports. It may be recalled that a 
free rupee was suggested as one of the alternatives to fixed 
sterling rate. But a "free" exchange would have been a 
rising exchange and though it would have checked gold 
exports, it might have completely disorganised trade. The 
only other alternative was to have linked the rupee to gold 
at a low rate, thus to have raised the rupee price *of gold 
higher than its sterling price and made the export of gold 
unprofitable. The Government could then have purchased 
gold in the market at that price and sold part of it to pay 
off its sterling debts and to meet other obligations- 

The whole position must, therefore, be examined with 
reference to the economic benefit or loss to the country 
caused by gold exports. If gold exports were beneficial on 
the whole no criticism of the srerling link or ratio need be 
made on that account- If gold exports were injurious to 
the interests of the country, the measures that cfcmld be 
taken to check them, including a change in the basis or 


exchange value of the rupee, deserve consideration. 

The case in favour of gold exports being left unchecked 
was ably put forward by Sir George Schuster, the Finance 
Member and other official spokesmen. 1 Gold was sold, 
they said, to tide over a period of exceptional difficulty and 
the Government were not justified in interfering with 
people's right to sell gold and reap the benefit of high price. 
If gold hoards were not to be drawn upon by the people in 
hard times, what purpose did they serve ? Besides it was 
far better that gold was taken out of hoards and relieved 
economic distress or got converted into profitable invest- 
ment than that it should have continued to lie barren and 
unproductive. Gold exports also enabled the country to 
maintain a favourable balance of accounts and their quantity 
was small compared to the vast reservoir of gold built up 
in years preceding 1931. 

Gold exports enable the Government to obtain large 
quantities of sterling and to pay off the sterling debt of 15 
millions which matured on 1st January, 1932. They also 
made it easy for the Government to meet recurring sterling 
obligations and to reduce the floating debt in India. The 
credit of the Government, therefore, greatly improved and 
the rates at which the Government could borrow were 
substantially lowered. To cancel the sterling obligations 
by selling gold at a time when sterling price of gold was 
high was definitely a wise measure. 

The position of the reserves was strengthened by the 
addition to them of sterling securities. During the 15 months 
from September 1931 to December 1932 gold of the value 
of 80 millions was sold- External balances of currency of 
80 millions were thus acquired of which the Government 
acquired 69J millions by open purchases in the market as 
currency authority. Out of this they used 34 millions 
for meeting current requirements and 35i millions to 
reduce India's external obligations and strengthen the 

1 Budget Speech, 1932, paras. 69-75 ; 1933. paras. 17-27 Legislative 
Assembly Debates, 1932, Pol. 11 and 1933, Vol. II 

Alscf the Address of His Excellency the Viceroy to the Legislative 
Assembly 1932 - Legislative Assembly Debates, 1932. Vol. /. 


These arguments in favour of gold exports could be rein- 
forced further by others which supported the official point 
of view. The export of gold strengthened the rupee-sterling 
exchange in particular and sterling in general- It stimulated 
Indian exports by raising the purchasing power of countries 
importing gold and also encouraged imports into India by 
enabling sellers of gold to purchase imported commodities. 
The sellers of gold made an enormous gain because they 
purchased it when it had a lower value in goods and rupees 
and sold it when it had appreciated in terms of both goods 
and services. 1 Above all, sterling had had a more or v less 
steady value in terms of goods, was a more secure interna- 
tional currency than gold and while the future price of gold 
was uncertain, sterling was appreciating in terms of other 
currencies. 1 It was highly improbable that gold would 
have the same position in the world's monetary systems 
(even if they went back on gold) as it had before and for 
India at least an independent standard not a gold standard 
but a standard backed by moderate quantity of gold and 
aiming at internal stability would be most desirable. It 
was better, therefore, to have sold out gold and invested 
part of it in interest-bearing securities than to have retained 
it in the country as a dead asset. 

Indian commercial and public opinion was, however, 
opposed to unrestricted outflow of gold- An embargo on 
gold exports and the purchase of gold in the open market 
by the Government were urged by the Federation of the 
Indian Chambers of Commerce and Industry. 2 The main 
grounds on which the Government policy of non-inter- 
ference with gold exports was criticised were five ; firstly, 
the Government had been parting with an appreciating com- 
modity, gold, for a depreciating commodity, i-e., sterling and 
the loss thus incurred was far in excess of any interest that 
might be earned on sterling securities; secondly, it was 
doubtful if "the dethronement of King Gold from his proud 
position" hid really been accomplished and so long as it was 
not accomplished there was an obvious advantage in retain- 

1 B. P. Adarkar: *A Review of Gold Export Fallacies' in the Indian 
Journql of .Economics, January, 1936, Paras 10, 12 and 21 Also A. D. 
Gayer: *' The paper moneys of the Sterling area retained a temarkably 
steady purchasing power on the whole. ..while gold underwent an outra- 
geous appreciation in value" Monetary Theory and Economic Stabilisation, 
p. 175. 

8 Resolution of the Federation of Indian Chamber of Commerce, 
dated, 26th March, 1932. 


ing within the country a metal which the world might in 
future once again adopt as the basis of credit ; thirdly, if the 
Government had bought the gold and after selling a part of 
it to meet its sterling obligations retained the rest, they 
could have used it later to strengthen the banking reserves 
of the country ; fourthly, if the price of gold rose in future 
due either to increased world demand for gold or decline 
in its production, the gold that was exported would have 
to be purchased, if it was required, only at a loss. Fifthly, 
gold exports had thrown a veil over the seriously shrinking 
balance of trade and prevented a clear appreciation of the 
alarming deterioration in the country's position as an agri- 
cultural producer and as a debtor on international account. 

The role of gold in the future monetary systems of the 
world was an important consideration in the discussion 
about gold exports. If gold was going to occupy the same 
position as before 1931 and the countries were to return to 
some form of gold standard, the Government policy of non- 
interference with gold exports justly deserved criticism. It 
could be maintained, however, that even in the event of 
other countries returning to gold after building up their gold 
reserves, India might find it advisable to have an indepen- 
dently managed monetary system not based on gold This 
would bring the discussion back to the old question : would 
any currency standard without a tangible gold backing 
inspire public confidence and would not, in the absence of 
such confidence, the uneconomic habit of hoarding con- 
tinue ? If the end in view was an independant monetary 
system managed with a view to internal stability, only a 
drastic remedy like a liquidation of the entire stock of gold 
at an early date to be followed by prohibitive duties on 
both gold and silver 1 could meet the demands of the situa- 
tion. This negative remedy might have been supplemented 
by a positive ones.e., the establishment of a network of some 
kind of savings banks adapted to the needs of rural people 
all over the country. 

1 See Indian Journal of Economics, January 1936. 



Leaving side for the present the question of the monetary 
standard of the future/ it might be asked if there^was a 
way by which the Government could retain gold within the 
country. If the rupee had not been linked to sterling, an 
embargo could be placed on gold exports and gold purchased 
by the Government- The Government could then have 
stabilized the rupee in terms of gold and sold the gold thus 
acquired to purchase sterling, which was progressively 
depreciating, to cancel sterling debts. The inflation caused 
by gold sales could have been neutralised to the^ required 
extent by raising loans in the market. A planned 'reflation 1 
could thus have been undertaken. 

After the rupee had been linked to sterling, an interference 
with gold exports was unnecessary. The Government 
required sterling to pay off sterling debts and strengthened 
the reserves by purchasing sterling securities. Inasmuch as 
the rupee was linked to sterling, a definite advantage was 
obtained by cancelling sterling debts and adding sterling 
securities to the reserves. One benefit of gold exports, i-e., 
a rise in prices due to issue of fresh currency was, however, 
not obtained owing to the replacement of a part of gold ^in 
hoards by rupees and currency notes and the depressing 
effect of the rapid decline in world prices- 

While an embargo on gold or the, purchase of gold by the 
Government had very little to recommend it after the rupee 
had been linked to sterling, the same could not be aid of a 
small export duty on gold. If the duty had fallen ultimately 
on the bullion dealers, it was amply justified and even 
if it had come out of the unexpectedly high price obtained 
by the seller of gold, it would have been unexceptionable. 
The proceeds of such a duty could be utilised to relieve the 
economic distress in rural areas. 


The export of silver from India was also stimulated by 
the abandonment of gold standard in September 1931. 2 It 
was, however, small compared to the large quantities sold 
by the Government of India from 1927 onwards. The silver 

1 See Chapter XII. 

2 Report of the Controller of Currency, 1931-32, para 25, 


sales were undertaken in accordance with the recommenda- 
tions of the Hilton Young Commission. The Commission 
held that when convertibility of notes into rupees was 
abolished under the system proposed by them and one 
rupee notes were introduced, big reserves of silver would 
be unnecessary. They, therefore, recommended that the 
unduly large stocks of silver in the Paper Currency Reserve 
should be gradually reduced from about Rs. 85 crores to 
Rs. 25 crores in about ten years. They also recommended 
that 'no favourable opportunity of fortifying the gold 
holding in the Reserve should be allowed to escape-' 1 

When the Commission reported there were 91 crores 
of rupees in the Reserve. The Government of India began 
to sell silver in 1927 and upto 31st March 1934 had sold a 
little over 196 million fine ounces of silver or about 57 
crores of rupees- They still held 104 crores of rupees in 
September, 1933, i.e., there was an increase in stocks owing 
to the return of silver coins to the Reserve ; for people had 
begun to substitute gold for depreciating silver in their 
hoards. A loss of about 33 crores was incurred by the 
Government on the sales. The proceeds of silver sales 
were utilized not to increase gold reserve but to meet the 
current requirements. 1 The silver sales depressed the price 
of silver and also resulted in deflation of currency. 

By the International Silver Agreement of July 1933, the 
Government of India bound themselves to sell not more 
than an average of 35 million ounces (equivalent to 9 crores 
of rupees) annually for four years, i.e.* from 1st January 
1934 to 31st December, 1937. This coupled with the agree- 
ment of U.S.A. and other silver producing countries not tc 
sell silver but to purchase 35 million ounces annually 
stabilised the price of silver. During 1938-39 the price 
remained fairly steady varying between Rs. 48 and Rs. 53 
per 100 tolas. The purchasing policy of the United States 
Government was during this period the main prop of the 
silver market. 

1 Rcport of the Hilton Young Commission, pras 78 and 80. 
1 " Out of the silver we have sold we have realized about 15f 

millions which has helped us to avoid borrowing n 

Sir George Schuster's speech on 21st November, 1933. 



The determination of the Government to maintain the 
sterling link of the rupee at Is. 6d. was inade clear beyond 
doubt in 1934 when the Reserve Bank of India Act was 
passed. The question of monetary standard best suited to 
India was left to be considered when the international 
monetary position became clear and stable and the Reserve 
Bank of India was placed under a legal obligation to main- 
tain rupee-sterling ratio at Is. 6d. 

The establishment of the Reserve Bank of India in 1935 
ended duality in the control of currency and credit. It 
gave promise of a new era of systematised currency and 
credit control exercised to secure monetary stability. The 
constitution of the Bank bears most of the features incorpo- 
rated in the Bill of 1927 which was dropped finally in 1928. 
The Bank is a shareholders 1 bank with an original capital 
of Rs. 5 crores divided into shares of Rs. 100 each. The 
risk of political influence entering the Bank has been sought 
to be eliminated by making it a private shareholders' bank. 
To check the tendency towards the concentration of shares ' 
in a smaller number of hands, a provision was made in 1940 
that no shareholder of the Bank can come in possession 
after the 26th March 1940 of additional shares of the value 
of more than twenty thousand rupees- The supervision 
and the direction of the Bank's affairs have been entrusted 
to a Central Board of Directors composed of sixteen 
members one Governor and two Deputy Governors, 
twelve Directors and one Government official. Of these 
the Governor and two Deputy Governors, four Directors 
and the Government official (i. e., eight members in all) are 
to be appointed by the Governor-General-in-Council the 
remaining being elected but a Deputy Governor and the 
Government official are not entitled to vote- There are five 
Local Boards of the Bank, in Delhi, Madras, Bombay, 
Calcutta and Rangoon. Salaried officials of the Government 
or Indian States, insolvents; people of unsound mind, bank 
employees and Directors of banks other than co-operative 
banks cannot become Directors or members of a local 
Board of the Bank but the Governor, Deputy Governors 
and the Government official on the Central Board are 
eligible even if they are salaried officials, bank directors or 
bank employees. 


The Reserve Ba'nk of India has been assigned the role 
and the functions of a central bank and transacts such 
business as it has been authorized to transact by the Reserve 
Bank of India Act, 1934. It has the sole right to issue bank 
notes which have replaced gradually the Government of 
India currency notes. 1 The Reserve Bank notes are legal 
tender and are guaranteed by the Cover nor- General-in- 
Council. Bank notes of the denominations of Rs. 5 and 
Rs. 10 were issued in January and February 1938 and those 
of Rs. 100, 1000, and 10000 later during the same year. 
Notes of the denomination of Rs. 2 were issued in 1943 to 
meet the special requirements of war conditions. 

The Bank has to receive money and make payments on 
behalf of the Secretary of State and Central and Provincial 
Governments. It receives the cash balances of Central 
and Provincial Governments and carries out remittance, 
exchange and banking business on their behalf. It has been 
entrusted with the management of public debt and the 
issue of new loans. It can accept money on deposit witlj- 
out interest from, and collect money for, the Secretary of 
State, Central and Provincial Governments, local authori- 
ties, banks and other persons. It can also make short-term 
advances for periods generally not exceeding three months 
to Central Government, Provincial Governments, Indian 
States, local authorities, scheduled banks and Provincial 
Co-operative Banks. It can act as agent for the Secretary 
of State, Central and Provincial Governments, States and 
local authorities for purchasing and selling gold and silver, 
bills of exchange, shares and securities and for collecting 
interest and dividends- 

Besides these various kinds of business transacted for 
the Government, the bank can purchase*, sell and rediscount 
bills of exchange and promissory notes drawn on and 
payable in India or England. It can purchase and sell 
specified securities, gold coin and bullion. It can borrow 
money for a period not exceeding one month and enter into 

1 As the Bank was (and continued to be .even after the separation 
of Burma in 1937) the central bank for Burma, it issued notes of distinc- 
tive design for Burma. 


agency agreements with an international bank or central 
banks of other countries. 

The Bank has been empowered to undertake ofien market 
operations, that is, on special occasions it can discount bills 
of exchange and make loans and advances directly and there- 
by expand, contract or stabilise credit- Normally the Bank 
will deal with scheduled banks and Provincial Co-operative 
banks and only on special occasions will it have to come into 
the open market i. e., deal directly with the public at large. 
Open market operations furnish a powerful instrument by 
which a Central Bank can regulate credit on eipergent 

The Bank is under an obligation to maintain rupee-sterl- 
ing rate at Is. 6d. by buying sterling at a rate not higher than 
Is. 6i\d. for a rupee and selling sterling for immediate 
delivery in London at a rate not lower than Is- 5*d. for a 
rupee. The amount of the sterling bought of sold is to be 
not less than 10,000. 

The Bank has an Issue and a Banking Department. The 
liabilities of the Issue Department arise from the note issue 
and the assets of the Department consist of gold coin, gold 
bullion, sterling securities, rupee coin, rupee securities and 
bills of exchange and promissory notes payable in British 
India. Qf the total amount of assets not less than 40 per 
cent is to consist of gold coin, gold bullion or sterling securi- 
ties and the amount of gold coin and bullion is to be not less 
than Rs. 40 crores in value. 1 Of the total gold coin and 
bullion not less than 85 per cent is to be held in British 
India. 2 The Bank has taken over the whole of the gold coin 
and bullion in the Gold Standard Reserve and the Paper Cur- 
rency Reserve and has assumed the liability of the currency 
notes of the Government of India. The liabilities and assets 

1 The most notable change in the composition of the assets brought 
about by the war is the enormous increase in sterling securities (from 
Rs. 59'5 crores on the last Friday of August 1939 to Rs. 1120'3 crores on 
29th March 1946). 

2 The whole of gold bullion and coin is now held in India and is 
valued at the old rate of 8.47512 grains of gold per rupee or Rs. 21-3-10 
per tola giving at the present value of gold (Match 1946) a hidden reserve 
of over Rs. 120 crores. 



of the Issue Department for the week ended 29th March, 
1946 are shown below : 



Notes held in the 
Banking Depart- 

Notes in circula- 





Total notes issued 12.38,40,98,000 
Total liabilities ... 12,38,40,95,000 

A. Gold coin and bullion 

(a) Held in India ,.. 44,41,45,000 

(b) Held outside 

Sterling securities... 11,20,32,89,000 
Total of A ... 11,64,74,34,000 

B. Rupee coin ... 15,82,59.000 

Government of 
India rupee 

securities ... 57,84,05,000 

Internal bills of 
exchange and 
other commer- 
cial paper 

Total Assets ... 12,38,40,98,000 

Ratio of total of A to Liabilities; 94.052 per cent 
The Reserve Bank of India is a bankers 1 bank and 
Scheduled Banks which numbered 89 on 30th June, 1945, 
have to maintain with it a balance amounting to at least 5 
per cent of their demand liabilities and 2 per cent of their 
time liabilities. Demand liabilities generally mean deposits 
withdrawable on demand and time liabilities deposits 
repayable after some period. The maintenance of a 
balance by the Scheduled Banks with the Reserve Bank is 
necessary because to make its policy effective, the Bank 
must have adequate resources and must be able to influence 
the credit policy of member banks. In actual fact, however, 
the banks have had ample resources of their own to lend 
and have rarely sought accommodation from the Bank. The 
bank rate has remained unchanged at 3 per cent since 
28th November, 1935. 


The greatest difficulty in controlling the monetary 
system in India arises from the existence of a vast mass of 
indgienous bankers and money-lenders who are responsible 
for about 90 per cent of trie credit transactions. These 
bankers must be linked up with the Reserve Bank. In 
August 1937, the Bank formulated a Draft Scheme for the 
direct linking of private bankers but as the conditions laid 
down in the scheme, such as closing other than banking 
business within a certain period and proper maintenance 
and audit of accounts did not suit the indigenous bankers, 
nothing came out of it. Meanwhile the Bank has collected 
and published information 1 about the operations of the 
non-scheduled banks with capital and reserves of rupees 
50,000 and over and tried to develop contacts with them- 
^Some non-scheduled banks and indigenous bankers num- 
bering 78 and 4 respectively at the end of June 1945 have 
been included in the list of banks approved by the Reserve 
Bank for concession rates of remittances. With effect < 
from the 15th February 1945, non-scheduled banks desirous 
of opening accounts with the Reserve Bank have been 
allowed to do so on specified terms and conditions. 

A more conclusive manner in which the Bank has been 
trying to secure proper regulation and control of the 
banking system is hy urging the need of enacting com- 
prehensive banking legislation. The necessity and impor- 
tance of such legislation have been enhanced by the spate 
of bank floatations during the war and by the apprehended 
danger of widespread banking collapses in the post-war 
period. Proposals for an Indian Bank Act were first made 
by the Bank in 1939 but in July 1941, the Government of 
India informed the Bank of its decision not to undertake 
comprehensive banking legislation in the existing abnormal 
war conditions, In 1942, however, the Government amend- 
ed Section 277 F of the Indian Companies Act with a view 
to imparting preciseness to the definition of banking. On 
30th December 1942, again the Bank made two suggestions 
to the Government for the regulating of banking : firstly, 
that provision should be made in the Companies Act that 
subscribed capital must notbe less than half the authorized 
capital and the paid-up capital not less than half of the 
^-Memorandum on ^[on-scheduled Banks, 1939. 


subscribed capital and secondly, that no banking company 
should have other than ordinary shares- The Government 
of India invited opinions on the Bank's suggestions in 
March 1943 and in March 1944 they amended the Com- 
panies Act again to control the capital structure of banks 
and to restrict the periods for which an individual could hold 
the appointment of managing agent of a bank. All this did 
not, however, dispose of the need for comprehensive 
banking legislation and on the 16th November 1944, the 
Government introduced in the Central Legislative As- 
sembly a Bill to consolidate and amend the law relating to 
banking companies. The main features of the Bill are as 
follows : (0 a simple definition of banking with the object 
of limiting the scope of the legislation to institutions in 
which the funds are deposited primarily to ensure their 
safety and ready withdrawability ; () prescription of 
minimum capital standards ; (m) prohibition of trading 
with a view to eliminating non-banking risks ; (iv) inclusion 
in the scope of the legislation of banks incorporated or 
registered outside British India; (&) provision of an ex- 
peditious procedure for legislation ; (yf) inspection of the 
books and accounts of a bank by the Reserve Bank, when 
necessary; (vii) empowering the Central Bank to take action 
against banks conducting their affairs in a manner detri- 
mental to the interests of the depositors, and (viti) prescrip- 
tion of a special form of balance-sheet and conferring of 
powers on the Reserve Bank to call for periodical returns- 

The Bank has also created, in compliance with its 
statutory obligation, a special Agricultural Credit Depart- 
ment to link its machinery with rural credit agencies and to 
maintain an expert staff to study all questions of rural 
credit and give advice to governments and banks- A 
preliminary report of the Department on the main features 
of the rural credit problem was published in December 1936. 
A full report was submitted to the Government in 1937 in- 
dicating the various directions in which improvements might 
be made to enable the rural credit agencies to render better 
service to the agriculturist and pointing out the manner in 
which the Reserve Bank could render assistance. In a 
series of circular letters issued since 1938: the Bank has 
defined the conditions under which it would be prepared 
to provide finance to co-operative banks. Meanwhile the 


Department is engaged in an intensive study of problems 
relating to rural finance and in tendering advice to provin- 
cial agencies purveying rural credit. 

The outbreak of the war in September 1939 led to the 
establishment of a new Department of the Bank the 
Exchange Control Department to administer the various 
regulations relating to dealings in foreign exchange- The 
Department keeps in close touch with the Empire Exchange 
Control on the one hand and with the banking institutions 
and dealers authorised to deal in foreign exchange on the 

The Bank has to pay a part of its profits to the Govern- 
ment after meeting expenses and paying a dividend, fixed 
at 3| per cent upto 1942 and raised by an Ordinance to 4 
per cent since 1943, to the shareholders. The net profits 
and the amounts paid to the Government have been as 
follows : 

In lacs of rupees approximately 
Year Net Amount paid to the 

profits Government 

1935 (nine months) ... 56*06 42*9 

1936 ... 43'42 35'9 

1937 27'91 10'4 

1938 ... 38*45 20'9 

1939 2250 5-0 

1940 (six months) ... 29'29 20*5 

1940-41 (June-May)... 279'26 2617 

1941-42 (June May)... 341"54 324*0 

1942-43 (June May)... 769*81 749*81 

1943-44 ( June May)... 1026'58 1006-58 

1944.45 (June May)... 1489*27 1469*27 % 

The Bank keeps up a continuous exchange of informa- 
tion with the foreign central banks and watches closely the 
economic and financial trends in other countries. Through 
its Research Section which was placed under the charge of 
a Director of Research in May 1940 it collects data and 
organises research into subjects which are its direct concern. 
It also issues, besides its Annual Report on Currency and 
Finance, a number of other periodical and topical 

In maintaining stability of exchange and regulating credit, 
the Reserve Bank of India has acted in close collaboration 


with the Government of India; Mutual consultation and 
advice between the central banking institution of a country 
and the Government are part of a well established procedure 
all over the world and as the ultimate end of the two au- 
thorities is the same, chances of difference of opinion 
between the two are reduced to the minimum- In India, 
however, it is possible that the expectations of the public 
from the Reserve Bank whom they are learning to regard 
as the supreme national banking institution may not always 
square with the predilections of the Government in certain 
important matters of policy. The resignation of Sir 
Osborne Smith, the first Governor of the Bank, in 1936 
owing to differences (as the rumour had it) with the 
Finance Member of the Government of India and the 
appointment of the late Sir J B. Taylor, a member of the 
Indian Civil Service, as Governor did not seem to augur 
well for the growth of sound traditions of central banking. 
But now on an appraisal of eleven years' record of the 
Bank's working it may be said that it has endeavoured to 
serve India well and has in spite of several difficulties and 
obstacles laid firm and secure foundations for its future 
progress. The scope and value of its activities have steadily 
grown and it may safely be asserted that in the absence of 
the Reserve Bank, the handling of the monetary problems 
created by the war in India would have been a far more 
difficult affair. The appointment of Mr. (now Sir) C. D. 
Deshmukh as the first Indian Governor of the Bank in 
August, 1943 was both a pleasing and significant event in 
the Bank's career. For the Bank is being called upon to 
offer its counsels to the Government not only on the 
complex problems of the post-war period but also in respect 
of the important arrangements initiated in pursuance of the 
decisions of the United Nations, Monetary and Financial 
Conference in July 1944 for the regulation of world's 
monetary future and the presence of an Indian of outstand- 
ing ability at the head inspires confidence that India's 
interests will be properly looked after. 


The fell in prices which commenced towards the 
end of 1929 was particularly heavy in the case of agricul- 
tural commodities. As India produced and exported largely 
foodstuffs and raw materials, the depression made a deeper 


mark on its economic life than on that of industrially 
advanced countries. Th8 prices of both Indian exports 
and imports fell from 1929 onwards but the fall was much 
heavier in those of exports. 1 As the exports consist mostly 
of agricultural commodities and imports mostly of manu- 
factured goods, the real terms of trade turned against India. 
In other words, the unequal fall in the prices of agricultural 
and non-agricultural goods left India worse off inasmuch 
as a larger quantity of exports was needed to get the same 
quantity of imports in exchange. 

After 1929 there was for some years a continuous decline 
in the general level of prices as shown by the index 
numbers of wholesale prices. Both the Calcutta Index 
Number based on prices of 45 different commodities and 
the Bombay Index Number based on prices of different 
commodities registered a decline as shown below : 
Index Numbers of wholesale prices : 19 29 ==100 

Year Calcutta Bombay 































January 1939 
























1 From September 1929 

to June 1932, the prices of exported articles 

fell by about 47 per cent and 

of imported articles 

by about 16 per cent. * 


The bottom of prices was reached in 1932-33 when the 
fall was a little less than 40 per ceint compared to the level 
in 1929. There was some recovery in the next two years 
but it was in the latter part of 1936 that prices began to 
rise and the rise was almost continuous till August 1937. 
After that the prices began to fall and were generally on 
the decline till the end of June 1938 when they showed an 
insignificant rise which was more or less maintained till the 
end of 1938. 

The agriculturists who form the bulk of Indian popu- 
lation were in acute distress on account of the heavy fall 
in prices up to 1932-33, " When the upward movement 
started in 1932-33, the rise in the prices of commodities in 
which he (ie. t the Indian agriculturist) was interested was 
painfully slow and halting." 1 With the exception of a short 
period extending from the middle of 1936 to about the 
middle of 1937, there was during the period extending upto 
September 1939 no definite upward movement in the prices 
of primary commodities. Besides an almost constant low 
level of prices, trade restrictions and currency depreciation 
restorted to by most of the countries led to a shrinkage of 
Indian exports and deepened the misery of the Indian agri- 
culturist. The misery was relieved only to a limited extent 
by the trade agreements which the Government of India 
concluded with Great Britain in 1932 and 1935 and with 
Japan in 1934. 

The value of both exports and imports having fallen 
heavily after 1931, the balance of trade in merchandise in 
favour of India shrank rapidly. The actual position in 
respect of the total balance of trade was, however, marked 
by the heavy exports of gold which supplemented exports of 
merchandise. The table given on the next page shows the 
position in respect of exports and imports since 1931- 

* i Review of the Trade of India, 2937-38, p> 12. 



In crores of rupees 

Value of 

Total visi- 

Net ex- 

exports of 

Value of 

ble balance 

ports or 




imports of 

of trade 












of trade 












+ 3'22 






























(April Aug- 


+ 5-84 


ust only.) 

Figures for Kathiawar and Travancore ports have been 
excluded. Figures for Burma have been included. 

It may be noticed that while the total visible balance of 
trade in favour of India was fairly large throughout, the 
balance of trade in merchandise fell as low as Rs- 3 crores 
in 1932-33, increased thereafter reaching a figure about 
Rs. 78 crores in 1936-37 and fell again in 1937-38 and 
1938-39. For India excluding Burma, the balance of trade in 
merchandise and the total visible balance of trade were as 
follows : 

In crores of rupees. 

Year Balance of trade 

in merchandise 

193536 +5'1 

1936-37 +5T2 

193736 +159 

193839 +174 

193940 (April-August) + 70 

Total visible 
balance of trade 


If gold exports had not taken place on a large scale, the 
total visible balance of trade in favour of India would have 
been very small and both the payment of foreign obligations 


and the maintenance of exchange would have been rendered 
exceedingly difficult. Gold exports thus saved a very bad 
institution. They steadily fell off, however, and the de- 
crease in them was more than made up by an increase in 
exports. The growth of exports was almost continuous after 
1933-34 but the course of imports was somewhat erratic, 
During 1937-38 exports remained more or less steady but 
imports recorded a rise of about Rs. 35 crores. In the 
second half of 1937-38 there was an excess of imports over 
exports in each month except October and February. One 
reason given for it was that " a lag of this kind is to be 
expected in a country such as India which exports mainly raw 
materials and imports mainly manufactured goods. Her 
exports are affected comparatively quickly by world prices 
and conditions but imports arranged during a time of pros- 
perity continue to arrive after the upward trend has been 
reversed. IU The large imports during the latter half of 

1937-38 were thus a " carry over " from a period of brisk 
trade preceding it. It did not appear, therefore, that the 
increase in imports represented a permanent tendency. 
During 1938-39, both exports and imports registered a 
decline as compared to 1937-38, the balance of trade being 
s. 66 crores against plus Rs. 59 crores for 1937-38.* 

From September 1931 to 1935-36, gold exports kept the 
total balance of transactions largely in favour of India and 
the rate of exchange remained firm. Left to itself it might 
have risen even higher than Is. 6d. During the next 3 years 
(i, ., from 1935-36 to 1937-38) also, the exchange remained 
firm but the firmness was due to a marked improvement in 
India's balance of trade in merchandise. Throughout the 
year 1937-38 as during the previous two years, the rate 
remained near the upper limit fluctuating between Is- 6\d. 
and Is. 6/3 d? From April 1938, however, the effect of 
falling exports and increasing imports began to be visible 

1 Reserve Bank Report on Currency and Finance, 1937-38, p, 3. Also 
Review of the Trade of India, 1937-38, p. 69. 

2 There was a comparatively greater fall in the values of goods im- 
ported after the beginning of 1938-39 which was attributable partly to 
the reduction in the volume of imports and partly to the fall in prices. 

3 Reserve Bank Report on Currency and Finance t 1937-38, p* 


on the exchange rate which began to fall and reached a 
point lower than 1$. 6d. in the first week of June 1938. 
On June 6, 1938, the Government of India issued a com- 
munique making it clear that " they are satisfied that the 
maintenance of the present value of the rupee is required 
in the interests of India and that the resources available for 
this purpose are more than ample " and pointing out that 
44 the gold and sterling assets actually in the hands of the 
Reserve Bank and the Government of India are at the 
present time worth more than Rs. 160 crores." The 
Government announcement steadied exchange slightly but 
until the end of 1938, the rate did not rise higher than 

15. 5f a d. In the month of December forward exchange rates 
weakened and the Government issued another communique 
attributing exchange weakness to movements of funds to 
United Kingdom by speculators who wanted to bring them 
back at a profit when the ratio was lowered. They reiterat- 
ed their decision to maintain the exchange at the existing 
statutory rate. During the last quarter of 1938-39, there 
was an improvement in the balance of trade and the ex- 
change rate improved to I?. 5y d> in March 1939- The 
graph given on the next page is based on the average of 
daily telegraphic transfer rates from Calcutta on London 
and shows exchange fluctuations from 1930-31 to 1938-39. 

The demand for a lower exchange value of the rupee 
was pressed on the Government throughout the seven years 
preceding the war of 1939 by important sections of com- 
mercial opinion. One after another England, Scandinavian 
countries, Egypt, Japan, United States, Belgium, France, 
Holland, Switzerland, Italy and Czecho-Slovakia depreciated 
or devalued their currencies and each addition to the list 
of devalued currencies created an alarm in India and 
renewed agitation in favour of a lower exchange rate. The 
large influx of Japanese imports during 1932 due to dep- 
reciation of Japanese yen had to be counteracted by the 
Government by raising high the import duties on cotton 
piecegoods of other than British manufacture. In 1933, 
some prominent businessmen and industrialists formed the 
Currency League of India "to educate and organize public 
opinion with a view to opposing the continuation of I8d. 
sterling ratio as is sought to be done through the Reserve 



Bank Bill and to bring about an immediate devaluation of 
the rupee-" An amendment to the Reserve Bank of India 
Bill was moved in the^ Legislative Assembly to secure lower 
sterling exchange rate but was defeated. In October 1936 
after the devaluation of franc and other currencies of the 
gold bloc, the Indian commercial interests grew appre- 
hensive that India's export trade with these countries 
would receive further setback while imports from them 








into India would be stimulated- 1 The failure of the 
Government of India to revise Indian currency and ex- 
change policy in view of the devaluation of these currencies 
was discussed in the Indian Legislative Assembly on 
October 8, 1936. In May 1938, the Prime Ministers of the 
Congress-governed Provinces resolved to secure the co- 
operation of all the Provinces to send representations to 
the Government of India for the devaluation of the rupee. 
This was a significant move showing that most of the 
Provincial Governments had come to regard Is. 6d. ratio 
as injurious to Indian interests. The matter was taken up 
by the Indian National Congress which ^passed a compre- 
hensive resolution on the subject on December 14, 1938- 
The policy of the Government was all along clearly stated ; 
it could be summed up in the words of the then Finance 
Member, Sir James Grigg : "I will be no party to any 
monkeying about the present ratio." 8 

The fall in prices and the shrinkage of trade along with 
internal political disturbances led to a fall in both Central 
and Provincial revenues during 1931-32 and 1932-33. To 
make up the deficiency in central revenue, both retrench- 
ment and fresh taxation were provided for in the Supple- 
mentary Finance Act of September 1931. Most of the 
Provincial budgets also showed deficits and the Provinces 
which did not receive a square deal under the Meston 
Award felt the pinch most. Economy, retrenchment and 
taxation were all used to refstore budgetary equilibrium 
but the sagging agricultural prices did not permit any 
substantial improvement in finances. After 1933-34, there 
was a definite improvement in the central finance but most 
of the provincial governments continued to experience 
difficulties in balancing their budgets- After 1937 these 
difficulties became particularly acute in the provinces under 
Congress Governments which were losing excise revenue 

1 It was feared among other things that a devaluation of the guilder 
might reduce the protective value of the sugar tariff and facilitate im- 
ports from Java and that of dollar might encourage the import of Ameri- 
can cotton into India. 

2 Sir James Grigg's reply to the addi^ss of Indian Merchants Chamber 
(August 1935). 


owing to the gradual introduction of prohibition and were 
undertaking reforms involving increasing expenditure. Sir 
Otto Niemeyer's recommendations embodied in an Order-in- 
Council 1 provided for financial assistance to all the 
Provinces by cancellation and consolidation of debts, 
assignment of a share of the proceeds of jute export duty 
(to jute growing provinces), grants-in-aid to some provinces 
and the distribution of fifty per cent of the yield of income- 
tax among all the Provinces. The additional funds thus 
made available were readily absorbed in either filling up the 
gap in revenue or meeting fresh expenditure. In 1937-38 
and 1938-39 sums of Rs. 125 and Rs. 150 lakhs out of the 
proceeds of income-tax were distributed among the pro- 
vinces arid a much larger sum of Rs. 279 lakhs accrued as 
the provincial share in 1939-40. Sums of Rs. 265 lakhs, 
Rs. 251 lakhs and Rs, 256 lakhs were distributed in 1937-38, 
1938-39 and 1939-40 respectively as the provincial share in 
the proceeds of jute export duty. Subventions amounting 
to Rs. 312 lakhs, Rs. 303 lakhs and Rs. 303 lakhs respectively 
were also paid to the provinces in the three years. The 
provinces, therefore, received extra resources amounting 
altogether to over Rs. 22crores in three years (from 1937-38 
to 3939-40). Yet the Provinces wanted more funds and it 
was clear that no lasting benefit could be obtained by them 
without a substantial rise in agricultural prices and recovery 
in trade. 


Controversy about the correct rate of the rupee in terms 
of British currency is at least as old as the Fowler Committee 
of 1898. 2 The Committee had to decide between Is. 4d. and 

iThc Government of India (Distribution of Revenues) Order, 1936. 

* Even earlier than this the Her schell Committee in 1893 had con- 
sidered the proposal of the Government of India that English coinage 
should be made legal tender in India at a rate of not less than 13J rupees 
for one sovereign (roughly Is. 6d. : Re.) but had recommended that the 
ratio between gold coin and silver rupees should be fixed in the first in- 
stance not much above the rate then prevailing i* e., Is. 4d> to the rupee, 


a lower ratio and though the majority recommended Is. 4d. 
ratio, a minority argued in favour of a lower rate. The 
controversy arose again when the majority of the Babington 
Smith Committee of 1919 recommended 2s. (gold) rate 
and Mr. Dalai wrote a strong minute of dissent. It became 
acute after the publication of the Hilton Young Com- 
mission's report in 1926 and centred round Is- 6d rate re- 
commended by the Commission and given effect to by the 
Government. It may be noted that Is. 6d- ratio of 1927 31 
was virtually a gold rate and Is. 6d. ratio of post- 1931 
period was a sterling rate a material difference, con- 
sidering that in terms of gold the value of the rupee had 
fallen by about 40 per cent from September 1931 to the end 
of 1938. 

The critics of Is 6d. ratio included important Indian 
commercial and agricultural interests besides politicians and 
economists. 1 They considered the existing ratio highly 
injurious to India and would have it reduced to Is. 4d- 
sterling or even a lower figure if necessary. The demand 
for devaluation of the rupee was before September 21, 1931 
a demand for lower value of the rupee in terms of gold but 
was later on, when sterling had no longer a fixed relation to 
gold, a demand for lower value in terms of sterling. 

The devaluation of the rupee involved so many issues 
and touched so many interests that it was not easy to 
venture a categorical pronouncement in favour of or against 
it. An attempt to understand the issues as they were 
discussed during the years 1931 39 might be made by finding 
answers to four questions : 

1. What should be the object or objects of currency 
policy in India ? 

2. How far can that object be achieved by currency 
policy alone (i- e., unaided by measure of another kind) 

though they said that if circumstances required it, the Government of 
India might be empowered to raise it with the sanction of the Secretary 
of State (Report, paras 40 and 150). At that time, however, the question 
was not a controversial one. 

1 For an illuminating academic discussion of the ratio question, see 
The Sankhya of March and September 1937, and November and De- 
cember, 1938. See also Economic Problems of Modern India, Vol.11 
(edited by R. K- Mukerjee and H, L. Dey). Chaps. XXVI-XXVIII. 


3. Has stabilisation of exchange rate at 15. 6d- failed 
to secure that object ? What evidence is there that it has 
failed to do so ? 

4- If Ls. 6d. ratio has failed to do so, can devaluation of 
the rupee secure it ? If so, what should be the extent of 
devaluation ? 

There will be general agreement that the objective of 
currency policy in India should be determined with refer- 
ence to her economic position. India has been a debtor 
country, with a vast rural population, large internal trade 
and struggling industries. As a debtor country she had to 
meet foreign obligations amounting to more than 32 
millions. An exportable surplus of merchandise of that 

amount at least had to be maintained year after year. The 
alternatives were to export precious metals or to raise 
foreign credits. The interests of the vast rural population 
demanded that the prices of agricultural produce should 
cover the expenses of agricultural production The growing 
industries required protection from foreign competition 
and the large internal trade had to be saved from violent 
strains due to forces originating outside the country. 

As a debtor country India had naturally to attach great 
importance to the stability of exchange value of the rupee. 
Small changes in exchange ratio might cause big differences 
in the amount of foreign remittances. It could not be 
maintained, however, that an exportable surplus to meet 
foreign obligations could under all circumstances be main- 
tained by keeping exchange stable. Currency might have 
to be devalued and was actually devalued by several 
countries to rectify an unfavourable or falling balance of 
trade. Otherwise, too, rigid stability of exchange was 
too narrow an objective for a country like India with a 
large rural population and internal trade. An exchange kept 
rigidly fixed was bound to be a good conductor of distur- 
bances occurring in the outside world. It would expose 
the internal economy of the country to the stress and strain 
of external forces. In a very much disturbed world, ex- 
change rate had to be used as a 'shock absorber, of price 
disturbances occurring outside the country so that the 
prices inside the country might remain in level with costs 


and production and employment might follow a steady 
course. For India the maintenance of stable cost-price 
parity appeared to be a much more desirable objective 
than mere stability of exchange An exchange rate that 
secured adjustment between world prices and internal prices 
was not enough unless the internal prices were also brought 
into level with internal costs. It was obvious that no ex- 
change rate rigidly could clung to secure that object. 

It would have been claiming too much for currency 
policy to say that it alone could secure stability of produc- 
tion and employment. Currency policy by itself cannot 
rectify all maladjustments in the economic organization of a 
country. 1 Yet it is a powerful instrument which if wielded 
at a psychological moment can 'stop the rot f caused by an 
incipient or even deep depression and stimulate industries 
and trade- In Australia this instrument was used to the 
best effect and admirable results were obtained. It is true 
that certain special conditions in Australia such as the 
greater flexibility of wages and, therefore, cost of produc- 
tion mad%currency devaluation effective. But good results 
could be secured elsewhere also if the devaluation was 

Ever since Is. 6d. ratio was fixed in 1927, the Govern- 
ment expressed, reiterated, affirmed and reaffirmed their 
determination to maintain it and took all possible measures 
to that end. In 1929-30 and 1930-31 they experienced 
difficulty in maintaining it and contracted currency to the 
extent of over Rs. 40 crores. The abandonment of gold 
standard by England relieved them of the task of maintain- 
ing Is. 6d. gold rate. The linking of the rupee to sterling 
was a disguised depreciation in relation to gold. The 
pressure of inexortable forces thus made the Government 
adopt in September 1931 a course which they had refused 
to follow voluntarily. The heavy contraction of currency 
during 1929-30 and 1930-31 was justified by Sir George 

^'The entire economic system cannot be controlled by operating 
a single lever, through monetary mechanism alone, but control of that 
lever is indispensable in the pursuit of balanced economic advance". 
A, D. Gayer in Monetary Theory and Economic Stabilisation, n. 195. 


Schuster as a consequence of slackness in trade. 1 Even allow 
ing for trade slackness, it appears that the currency con 
traction was made necessary by the attempt to maintain 
lj. 6d. rate. Those opposed to Is. 6d. ratio, therefore, pointed 
out that the maintenance of Lv. 6d. ratio had not only fully 
exposed Indian economy to world depression but actually in- 
tensified certain of its effects by accentuating the fall in 

internal prices. The deflationary effects of the ratio had 
spread out like a heavy blanket over the Indian economy 
obstructing recovery and expansion. 

It was difficult to say how far there had been an adjust- 
ment between prices and costs during the 6 or 7 years 
between 1932 and 1938 and whether in 1938-39 the rupee 
was overvalued. The statistics available in this country 
about prices and costs are neither very accurate nor very 
reliable. The information about changes in price level is 
based on Calcutta or Bombay index numbers of prices, the 
method of construction of which can be greatly improved. 
There are no statistics directly relating to costs of produc- 
tion and use is, therefore, made of Bombay cost of 'living 
index number and statistics of agricultural wages (obtained 
from agricultural wages census reports) and of industrial 
wages (from other sources) to find out the trend of move- 
ment of costs a procedure open to criticism. It is clear, 
however, that while a definite tendency towards a marked 
rise in the index numbers ol wholesale prices was noticeable 
in the United Kingdom, U. S A. and other countries after 
1934, Indian prices exhibited no appreciable rise. The 
following table shows the movements of prices in India and 
a few other countries 

Index numbers of prices : 2929= 2 00 
1930 1931 1932 1933 1934 1935 [1936 1937 1938 

U. K. (Board of 
Trade) ... 87'5 76*8 74'9 75'0 771 77'9 827 95'2 88'8 

U.S.A. ... 907 76-6 68'0 69'2 78'6 83'9 84'8 90*6 82*5 

(Melbourne) ... 88'5 79'2 78' 3 78'2 81*6 81*5 85*6 91'9 92 '9 

Japan ... 82'4 69*6 73'3 81'6 80'8 84'4 89'9 108'4 114'3 

Canada ... 90'6 75'4 69*8 70'2 74'9 75*4 78'0 88*4 82'2 

India (Calcutta)... 82'3 68*1 64*5 617 631 64'5 64*5 72'3 76*6 

1 Address to the Conference of Finance Secretaries, October 1930. 


It was possible that the disparity between the price 
level in India and abroad was due to (1) heavier fall in 
agricultural prices and their halting upward movement and 
(2) rearmament programmes of several countries which led 
to a spurt in prices. Any persistent failure of Indian prices 
to catch up to world prices would, however, have to be 
attributed to Is. 6rf. ratio. Even if it could be established 
that this failure was not due to Is. 6d- ratio, there still 
remained a case for devaluing the rupee to initiate a rise in 
prices to benefit the vast agricultural population. 

An important argument advanced against devaluation of 
the rupee was that a measure of stability in international 
exchange relations had already been attained and India 
should not cause a disturbance just then by devaluing the 
rupee. It: might be pointed out, however, that the distur- 
bance might not have been so great as was feared and it 
would have been worth while to risk some of it in the 
interests of the agriculturists who form the bulk of popula- 
tion. Intensive enquiries in rural areas showed that at the 
prevailing level of prices the agriculturist could not meet 
his costs (including in " costs " ordinary wages and some 
return for enterprise). Many of the agriculturist's costs 
such as rent, land revenue and maintenance charges of 
livestock are more or less fixed and did not fall in propor- 
tion to the fall in prices. If agriculture had been a business 
and not a way of life in this country, many of those engaged 
in agricultural production would have closed the shop long 
before. That they did not do so or could not do so was no 
reason why they should not have been put in a position to 
meet their costs. Any relief given to agriculturists was 
bound to have a tonic effect on the entire enonomic system 
of the country. 

There could be difference of opinion as to how far 
devaluation of the rupee would stimulate our exports. The 
linking of the rupee to sterling at 1.5 6d. and the consequent 
depreciation of the rupee in relation to currencies based on 
gold did raise prices a little in India- Some advantage was 
undoubtedly secured in export trade with those countries 
which still remained on gold standard such as France, 


U.S.A., Italy and Germany but this advantage was largely 
neutralised owing to the imposition by these countries of 
high tariffs, quota systems and exchange restrictions or due 
to their resort to currency devaluation. It was highly 
problematic if any devaluation of the rupee would have 
stimulated demand for our exports or secured a passage 
for them through the iron bars of numerous trade restric- 
tions. It might, on the other hand, have led to competitive 
depreciation of currencies by other countries or retaliation 
in some other form. This danger could to some extent be 
mitigated by entering into trade agreements on the basis of 
a devalued rupee, if on other grounds devaluation was 
found desirable. As regard exports to countries of the 
sterling group, even a temporary improvement in trade 
could not be secured owing to the maintenance of the old 
rate of Is. 6d. A lowering of exchange rate to stimulate 
exports to these countries was subject to the same risk of 
retaliation. On the whole it would appear that no lasting 
increase in our exports could be secured without a general 
revival of world demand for them. This in turn depended 
upon the relaxation of international tension and the re- 
moval of barriers to international trade. Devaluation 
would, however, have enabled India to mainrain or 
strengthen her competitive position in the articles of export. 

The devaluation of the ru|>ee could be used as a lever to 
raise internal prices. The prices of exports and imports 
would have risen first and the rise might have slowly spread 
to other commodities which did not enter into India's foreign 
trade. This would have stimulated production and^ trade. 
It was pointed out, however, that while the rise in the 
prices of exports might take time in percolating to the 
primary producer, the price that he had to pay for imported 
goods would immediately increase. The Indian agricultur- 
ist would, therefore, obtain no advantage- from the 
devaluation of the rupee* If his costs rose as fast as prices, 
it was clear that no net benefit- could accrue to him. A 
plausible reply ^iven to this argument was that most of the 
farmer's costs did not depend on the prices of imported 


goods inasmuch as such goods formed only a small part of 
the agriculturist's consumption and in any case there was 
bound to be a time lag between the rise in prices and rise 
in costs. The agriculturist could obtain the benefit of this 
time lag. 

A rise in the prices of imports was, no doubt, undesir- 
able from the point of view of the consumers. It should 
not have been overlooked, however, that consuming is not 
the sole function of consumers ; they also work and produce. 
If opportunities for work and production are enlarged, the 
burden of slightly higher prices is lightly borne by the 
consumers. A rise in prices of imported goods would 
also have given added protection to Indian industries, 1 
particularly those which did not come under the scope of 
the policy of discriminating protection. It could not be 
ignored, however, that the protection given by currency 
devaluation is indiscriminate and could be justified only if 

the Government policy was so halting and vacillating that 
indiscriminate protection was the only alternative to 
inadequate protection. 

The existing position with regard to exports and imports 
could hardly be called healthy and normal. The merchan- 
dise balance of trade in favour of India (including Burma) 
amounted to about Rs. 43 crores in 1937-38 as against Rs. 71 
crores in 1937-38. This was primarily due to an increase 
in imports. Excluding Burma, the balance of trade in 
favour of India in 1937-38 was only Rs. 16 ftores in 1937-38 
as against Rs. 52 crores in 1936-37. It is said that " in fact 
the best proof of a well-chosen ratio consists of its harmony 
with a steady and moderate price level and a healthy and 
normal condition of imports and exports-*'* If this be the 
.proof of a well-chosen ratio, 15. 6d- ratio could hardly be 
said to have furnished it. 

1 In the case of large manufacturing industries, devaluation was 
advocated not as a measure of additional protection but to remove the 
handicap of an over-valued currency under which they had been labour- 
ing since 1927. It may be noted here that devaluation would have raised 
the prices of imported machinery, appliances and stores and to that 
extent handicapped Indian industries. 

1 J.C. Coyajee in The Asiatic Review, Vol. XXV, p. 412, 


The fall in prices in India not only upset price-cost 
parity, thus damaging production and increasing unemploy- 
ment but also brought about profound disturbances in distri- 
bution. It strained relations between debtors and creditors, 
landlords and tenants (particularly those paying contract 
cash rents), employers and workers and gave too arbitrary an 
advantage to men with fixed or gradually increasing incomes 
such as the government employees or pensioners. A rise in 
prices, if it could be brought about through devaluation, 
would not only have taken a load off the productive activity 
but also eased in great measure class relations. The in- 
terests of different classes might diverge up to a point but 
just as depression ultimately overwhelms all alike, 1 any lifting 
of it would have brought, sooner or later, relief to all. 

An important interest to consider in any discussion of 
the ratio was the Government of India who had to remit 
annually Home Charges amounting to about 32 millions 
A reduction in exchange rate by two pence would have 
increased the burden of Home Charges by about Rs. 6 

crores and upset the Budgetary equilibrium and credit of 
the Government of India. The Hilton Young Commission 
said that this was not a " decisive factpr". It could not, 
however, be ignored. A decrease in central revenue might 
not only have made fresh taxation necessary but might have 
also put a stop to the distribution of the provincial share in 
the proceeds of income-tax. All this followed from a short 
range view of tUfe matter and if this view alone had tp N pre- 
vail, the argument against an alteration of the ratio was 
strong. It stood to reason, however, that the fall in 
central revenue due to devaluation might have been more 
than covered by increased receipts from income-tax, railway 
contributions, cusroms etc., which a rise in prices and 
general trade revival would have brought about. 

Devaluation of the rupee, it is true, could give only a 
temporary stimulus to prices. Devaluation is never a 
get-rich-quick device. But when a country is emerging 

1 This is shown by the condition of agricultural debtors and 
money lenders both of whom suffered, the latter through inability to 
recover even interest, not to speak of the principal lent. 


from the nadir of depression it requires just that temporary 
stimulus to put it on the way to recovery. Devaluation is 
also a defensive weapon which may be used to protect in- 
ternal economy. For permanent results, however, remedies 
of another kind which would increase productive efficiency 
and lower costs of production must be applied. Devaluation 
is no panacea for economic ills. Furthermore, currency is a 
delicate instrument and when it is used to achieve non- 
monetary objects, it has to be used with care and precision. 
The time and manner of its use must be properly judged. 
Perhaps it could be used to the best effect in India in 1931 
and later on in 1933 or 1934. 


The Latest Phase in Ratio Controversy 

The ratio controversy entered a new phase and assumed 
a political complexion towards the end of 1938. The 
Working Committee of the Indian National Congress passed 
the following resolution on 14th December, 1938 : 

"Since the fixation of the ratio at Is- 6d. to the rupee 
all trade interests in India and public bodies have pro*- 
tested that this measure is against the > vital economic 
interests of India and have insistently demanded its 
revision. The Government of India have hitherto re- 
sisted all these attempts and at last issued a communique 
on June 6, 1938, declaring that it did not intend to make 
any change in the ratio for the time* being and in support 
of that declaration sought to rely.merely on the instability 
and uncertainty during the period of readjustment 
which, according to them, was likely to cause greater loss 
to Indian interests than any corresponding gain from the 
change to a lower ratio- Sinqe June last the balance 
of trade has turned more and more against India. The 
Committee are of opinion that the rate of Is. 6d. to the 
rupee has hit hard the agriculturist of this country 
by lowering the price of agricultural commodities 
and given an undue and unfair advantage to imports into 
this country. The Working Committee is satisfied that 
the rate of Is. 6d> cannot any longer be maintained by 


large exports of gold which have been very injurious to 
the country. Matters have now reached a stage when the 
rate can only be maintained by a policy of contractioft of 

currency and credit and by further depletion of the gold 
and sterling resources of India and particularly the Paper 
Currency Reserve. Those sterling resources have already 
been used up to an alarming extent and there is a danger 
of further serious depletion taking place if efforts continue 
to be made by the Government of India to maintain the 
present ratio. The Working Committee look upon such 
prospect with the utmost concern and anxiety. In view of 
this situation the Working Committee have come to the 
conclusion that the best interests of the country demand 
that efforts to maintain the present exchange level should 
henceforth cease and urge upon the Governor-General- 
in-Council the necessity of taking immediate steps to 
lower the rate to Is. 4d- to the rupee. " 

The Working Committee's criticism of the Government 
policy in maintaining Is. 6d. ratio could be reduced to the 
following : 

1. Since June 1938, the balance of trade had turned 
more and more against India, indicating the unnaturalness 
of the ratio under the existing economic conditions. 

2. Is. 6d. rate had hit hard the Indian agriculturist by 
lowering the price of agricultural commodities. 

3. Is. 6d. rate had given an undue and unfair advantage 
to imports into India. 

4. Is. 6d. rate could be maintained only by contraction 
of currency and credit and further depletion of gold and 
sterling resources. 

5. Sterlirfg resources had already been used up to an 
alarming extent to maintain the ratio. 

The Government of India issued a communique on the 
16th December 1938, disputing the facts and countering the 
arguments set forth in the Working Committee's statement. 

It ran as follows : 


" The Government of India wish to make it clear that 
they have no intention of allowing a lowering of the 
present exchange value of the rupee On the contrary, 


intend to defend it by every means in their power and 
are confident of their entire ability to maintain it. 

It is said that since their previous declaration of June 6, 
1938, the balance of trade has turned more and more against 
India. The fact is that, in every mouth since June, the 
balance of trade, even excluding treasure, has been in favour 
of India and to an extent greater than in the corresponding 
month of the previous year. 

It is said that the sterling resources of India, particular- 
ly those of the Paper Currency Reserve, have been used up 
to an alarming extent. The facts are that the assets of the 
Paper Currency Reserve were merged in those of the 
Reserve Bank in April 1935, and that the gold and sterling 
resources of the bank are as high now as they were at the 
time of its inception and are in any event more than 50 per 
cent of the total liabilities as opposed to a statutory require- 
ment of 40 per cent only. Moreover, since the inception of 
the Bank, 60 crores of sterling debt have been repatriated- 

It is said that the Is- 6d. ratio has hit hard the agriculturist 
by lowering the price of agricultural commodities. The 
fact is that, since June last, the trend of the price-index of 
the chief articles of export has been definitely upwards. 

The Government of India are convinced that a lowering 
of the ratio in the existing international market conditions 
would produce no appreciable rise in what the cultivator 
can realize for his produce. They are equally convinced 
that it would produce an immediate rise in the cost of what 
he buys. 

It would also seriously weaken the budgetary position of 
the Central Government and the larger Provincial 

In fact, a lowering in the ratio would do no good to 
anybody except the moneyed and speculative interests who 
profit from conditions of uncertainty and disturbance or 
who secure an additional but unseen all round increase of 
12i per cent in the protection afforded to them at the ex- 
"pense of the consumer. 

Altogether the Government of India have no doubt that 
it is their clear duty in the interests of India generally and 
the cultivator, in particular, to defend the present ratio to 
the utmost of their power. As already stated, they have 


every belief in their ability to do this and they are confident 
that drastic measures of contraction will not be necessary, 
except to the extent that they are forced on them by the 
action of speculators who place their funds abroad in the 
hope of bringing them back at a profit. Incidentally, they are 
convinced that the exchange would be materially stronger 
to-day, were it not for the fact that there have been large 
movements of funds to the United Kingdom by these same 
speculative interests during the last year." 

The Government communique was cleverly worded and, 
while exposing to attack the weak points in the Working 
Committee's statement, concealed many weaknesses in the 
position it sought to defend. It was, for example, true that 
from June to October 1938, the balance of trade had been 
in favour of India to an even greater extent than in the 
corresponding period of 1937- But the period of 1937 did 
not furnish the correct basis for comparison ; for during it 
imports had been stimulated by the preceding boom con- 
ditions and the balance of trade had begun to shrink. A 
comparison with conditions in 1936 or three or four years 
preceding it showed considerable fall in the total visible 
balance of trade. 

The commiinique pointed out that the price-index of 
chief articles of export had an upward trend since June 
1938. The trend was, it may be said, not well-marked and 
in any case the rise of agricultural prices during the previous 
four years of recovery had been painfully slow and 

The Government met the argument that Is. 6d. ratio had 
given an undue advantage to imports into India by a 
counter-argument that a lowering of the tatig would only 
benefit those who would secure "\2\ per cent increase in the 
protection afforded to them at the expense of the consumer 
(meaning the Indian industrialists) or those speculators 
who profited from instability in exchange- 


The Government denied any depletion of the resources 
which were available to maintain exchange. Actually, how- 
ever, the sterling balances of the Reserve Bank had fallen 
and the sterling assets of the Bank cou^d not have been 
maintained unimpaired but for gold exports. 


Tfie Government attributed the weakness o exchange 
to the speculative movement of funds outside the country 
and expressed confidence in their ability to maintain the 
ratio without contraction of currency. The weakness in 
exchange, it is unnecessary to emphasize, is generally due 
to causes more fundamental than the action of some specu- 
lators and unless an adaptation to the fundamental shift in 
economic conditions is brought about through devaluation, 
contraction of currency has to be resorted to. 

Tlie arguments given in the communique against devalu- 
ation were ; firstly, it would produce no appreciable rise in 
the prices of agricultural products and would on the other 
hand, raise the costs of the former : secondly, it would 
seriously weaken the budgetary position of the Central 
Government and the larger Provincial Governments ; thirdly, 
it would benefit nobody except " moneyed and speculative 
interests " and Indian industrialists. 

These arguments were familiar enough and have been 
dealt with in 6. 


IX Period : September 1939 August 1945 



On the eve of the outbreak of War, there were, bioadly 
speaking, three open questions of Indian currency, iiz>, 
suitability of the currency standard, correctness of the ex- 
change ratio and the desirability of gold exports, the first 
two having a much longer history behind them than the 
third. Discussion about all three of them had lost none of 
its Jiveliness in the first half of 1939, though it was not 
keyed in the same high pitch of controversy as in the years 
between 1931 and 1938. There were, of course, reasons 
more substantial than mere love of polemics for this con- 
troversy not being laid finally to rest. The reasons were, 
firstly, that neither the economic developments in the in- 
ternational sphere nor the economic conditions within the 
country had furnished any firm evidence in favour of the 
view that sterling exchange standard, Is. 6d, ratio and 
gold exports were more beneficial than harmful to the 
country's interests ; secondly, that the government had 
consistently refused to reconsider or modify in any way 
the decisions they had once taken on these questions. It 
appeared, therefore, that only a major catastrophe like a 
war would clinch the issues and bring about their re- 
consideration by effecting a radical transformation in the 
economic milieu. But wars do not generally solve old 
problems except by raising new ones and, so far as the out- 
standing Indian currency problems are concerned, the 
present war may be said to have solved the old ones only 
by casting them into the background and raising new ones. 


The demand for finding a suitable exchange parity of thk 
rupee, other than L*. 6d- rate, lost all its force after the 
outbreak of the war. Is. 6d. rate had never been firmly es- 
tablished ever since its adoption in 1927 and the linking of 
the rupee to sterling and the consequent conversion of 15. 6d< 
gold rate into Is. 6d. sterling rate at a time when sterling 
was depreciating in relation to gold amounted to a disguised 
devaluation of the rupee in terms of gold. And though for 
some years after 1931 the exchange firmed up, its strength 
was derived mainly from the adventitious aid of gold 
exports. When gold exports began to decline in volume 
and the balance of trade began, after June 1938, to turn 
more and more unfavourable to India, the exchange began 
to show signs of weakness. Since September 1939, 
however, it has been, on the whole, very steady, finding 
solid support from a very favourable balance of trade as 
well as from intensive measures of trade and exchange 
control. In the early weeks of war the forward exchange 
rates weakened and the Reserve Bank took the unprece- 
dented step of entering the forward market and announcing 
its readiness to purchase sterling for forward delivery at a 
rate spmewhat higher than its spot buying rate. This had 
the effect of steadying the market. 

As the rupee-sterling rate and the balance of trade have 
normally a close relation to each other, the state of trade 
balance may be referred to here in passing. The total 
balance of trade in merchandise of India and Burma 
together (for the two have formed one unit for currency 
and exchange purposes) was +Rs. 2012 crores during April- 
August 1939 and +Rs. 56. 94 crores during September 1939 
March 1940 as against 4-1751 crores and + 2570 crores in 
the corresponding periods of 1938-39. During the six years 


from 1939-40 to 1944-45, the balance of trade in merchandise 
of India and Burma together has varied as follows : 

Period Balance of trade 

(in crores of rupees) 
1939-40 4-78*02 

1940-41 +68'54 

1941-42 +79'88 

1942-43 +84-25 

1943-44 -f-91'32 

1944-45 +26' 08 

Since the beginning of the war, the rates of Telegraphic 
Transfers from Bombay on London have remained in the 
neighbourhood of Is. 6d. and the amount of sterling pur- 
chased by the Reserve Bank has steadily increased. From 
August 1939 to March 1940, the Bank made record purchases 
of sterling of the total amount of 70*5 million ; in 1940-41, 
1941-42, 1942-43, 1943-44, and 1944-45, the purchases 
amounted to 571 million, 73'3 million, 917 million, 
105*3 million and 91*8 million respectively at an average 
rate of Is. 6d. In addition to these open market purchases, 
the Reserve Bank also received large amounts of sterling on 
account of the purchases made by the British Government 
in the Indian market. Two other notable items accounting 
for the receipt of sterling were gold and silver exported and 
sold abroad and the grants received from the British 
Government for the modernisation of the Indian army. The 
sterling holdings of th Bank have considerably increased 
and even afte the utilization of sterling for repatriation 
schemes and for meeting other sterling commitments, the 
holdings stood at 709 million or Rs. 945 crores at the end 
of March 1944. 

Attention may be drawn here to one significant aspect of 
the rupee-sterling exchange ; the fixed rupee-sterling rate 
with a very favourable balance of trade has been conducive 
to a large rise in prices in India- The balance of exports 
over imports has been paid off by the issue of fresh rupees 
against sterling accumulations in England. An exchange 
rate left free to rise in response to a favourable balance of 
trade would have operated to some extent as an automatic 
corrective by discouraging exports and would have to that 
'extent checked the rise in internal prices. Even if exports 


were not discouraged, it would have involved a smaller issue 
of rupees in India against a given amount of sterling received 
in payment for exports. The contrast between a rising 
exchange during the last war 1 and a fixed exchange during 
the present war is of considerable interest. 

The institution of the system of exchange control is one 
of the most important wartime developments in the Indian 
currency system. Provision for it was made in the Defence 
of India Ordinance promulgated on the outbreak of war, 
the Financial Provisions in Part XIV of the Ordinance 
providing, inter alia, for : 

(0 restrictions on purchases of foreign exchange, 

00 acquisition by the Central Government of foreign 



(Hi) restrictions on purchases and export of securities, 

GV) acquisition by the Central Government of foreign 


The powers taken by the Government of India in these 
matters were delegated by them to the Reserve Bank of India. 
On the 4th September 1939, the Bank issued an explanatory 
memorandum to the public giving the general lines of ex- 
change control instituted in India. 8 All dealings in foreign 
currencies including sterling were now required to be made 
through only such dealers as were authorized by the Reserve 
Bank to deal in foreign exchange. Transactions in the 
currencies of the Empire countries (with the exception of 
those of Canada, Newfoundland and Hong Kong) were to 
be free from any restriction but those in non-Empire cur- 
rencies were restricted to genuine trade purposes, travel- 
ling expenses and small personal remittances. All 
transactions were to be done on the basis of the rates 
quoted by the London Exchange Control combined with 
the current rupee rate of exchange- 

1 Vide page 36, '" 

1 Economic Resource* Board : Statutory and other Notices, pp. 59-66 
and Reserve Bank Report on Currency and Finance, 1939-40, pp. 10-11. 


Although the exchange control has been operated on the 
general lines indicated above, modifications and changes in 
the original system had to be made as the war dragged on, 
to meet the ever present need of conserving foreign ex- 
change. All the functions of the Reserve Bank regarding 
exchange control are now directed by the Exchange Control 
Department specially organised in October 1939^ and work- 
ing under the direct supervision of the Governor of the 
Bank- Developments since the exchange control was 
instituted in September 1939 are too numerous to be men- 
tioned in detail but the chief among them can b*e grouped 
under the following broad headings : 

(0 Extension of free sterling area : 

The free sterling area i.e., the area within which funds 
move freely, constituted as it is by all the countries in the 
British Empire excluding Canada, Newfoundland, Hong 
Kong, the mandated .territories, Egypt and Iraq, was extend- 
ed by tha inclusion of Belgian Congo, Iceland and Foroe 
Island, Syria and Lebanon and Madgascar and its 
dependencies. From January " 1944, the French Overseas 
Empire not under enemy control and the French establish- 
ments in India were excluded from the sterling area. 

(ii) Restrictions on the disposal of foreign exchange : 

Under an Export Control Scheme which covered all 
the exports, the value received for exports in foreign (non- 
sterling area) currencies had to be utilized in a manner 
approved by the Reserve Bank. 1 The scheme ensured that 
the foreign exchange proceeds were not retained abroad 
and the regulations of the London Control in the matter 
of official rates at which currencies are dealt in were not 
evaded. * 

1 The despatch of parcels from India to any place outside the "sterling 
area was also subjected to a similar system of control. 

8 In the early months of the War, two rates for sterling in terms of 
dollars came to be quoted the controlled rate of the London Exchange 
Control and the free sterling rate. The latter was the rate of the free 
market and was lower than the former. The unfavourable consequence 
of the simultaneous existence of the two markets m sterling for India 
was that payment was received for those of her exports to which con- 


Under a system of import restrictions introduced from 
20th May 1940, the sales of foreign currencies, especially 
those of 'hard currency 1 countries, 1 were severely restricted 
to payments for licensed imports and a few private re- 
mittances. 1 Some relaxation of these restrictions was 
allowed during 1944-45 to permit larger imports of consumer 
goods and grant greater facilities for foreign travel tor 
business and educational purposes. 

(in) Acquisition of dollar balances and securities : 

Dollar balances held in United States by the residents in 

India as also the holdings of such residents in certain 

American securities were acquired, rupee equivalents of the 

amounts acquired having been paid out by the Reserve Bank. 

(iv) Restrictions on exports and imports of coins, currency 
notes, etc- : 

To prevent any person getting round the exchange con- 
trol regulations by taking cash and jewellery out of India, v 
limits were laid to the extent to which they could be taken 
out- From November 1940, the export from India of any 
currency notes or coins, whether Indian or foreign, except 
under a license from the Reserve Bank was prohibited. 
Taking out of gold in any form from India without permis- 
sion of the Reserve Bank was also prohibited, 
trolled rate did apply at the rate of or Rs. 11-5-4 for every $4'02 worth 
of goods, while at the free sterling rate of $3*50= 1= Rs. 13-5-4, the 
same goods worth $4 '02 would have brought to the Indian exporter 12 
per cent more in terms of rupees, Payment for the exports of goods to 
which the controlled rate did not apply was, on the other hand, received 
through the free sterling market The East India Cotton Association 
drew the attention of the Reserve Bank of India to this matter (vide The 
Statesman dated May 3, 1940 for a summary of the correspondence bet- 
ween the Association and the Bank). By the Export Control Scheme, 
the free sterling market was gradually eliminated. 

i The term 'hard currency' is used for a currency which is based on 
gold or is linked to a currency based on gold e.g. U. S. dollars and 
Swiss francs. 

*It need hardly be laboured that restrictions on and control of 
exports and imports are essential adjuncts of exchange control In fact, 
trade control and exchange control reinforce each other and one .would 
not be so very effective without the aid of the other. 


Restrictions on dealings in the Bank of England notes 
were imposed in September 1940 and further tightened in 
October 1941 with the object of preventing any market 
developing in such notes smuggled from the enemy-occupi- 
ed territories. From September 1943, the import of all 
currency or bank notes other than the Reserve Bank and 
Government of India notes issued in India, 1 Ceylon rupee 
notes, Iranian rials and Afghanis was prohibited, except 
with the permission of the Central Government or the 
Reserve Bank of India and from January 1944 even the 
import of notes which were legal tender in India was pro- 
hibited in order to control the import of British Indian 
notes emanating from enemy sources. The import and 
export of Russian rouble notes were also prohibited in 
accordance with the regulations in force in U. S. S. R. 

(v) Restrictions on Chinese and Japanese accounts in 
India : 

With a view to assisting China to conserve her supplies 
of foreign currency, restrictions were imposed on the 
operations of the accounts held in India by the nationals of 
Free China. Regulations were also framed with the same 
object to ensure that the full proceeds of the imports from 
China were credited to the account of banks approved for 
the purpose. 

The balances of all Japanese companies and firms resident 
in India were frozen on the 28th July 1941, i. e., they could 
not be used except with the permission of the Reserve Bank 
of India. After the outbreak of the war with Japan in 
December 1941, all Japanese accounts were taken over by 
the Custodian of Enemy Property. At the beginning of 
1942, the accounts of persons and firms resident in Japanese 
occupied territories such as Hong Kong, Malaya, Nether- 
lands East Indies and British possessions in Borneo were 
frozen and could not be operated without the permission of 
the Reserve Bank. 

1 i. <?., the import of Burma notes of the Reserve Bank was also 
brought under control. 


(vi) Restrictions on remittances in foreign currencies : 

The remittance of profits and royalties by companies 
operating in India to any person resident outside the 
sterling area was subjected to license since October 1941 with 
a view to restricting the amount of such remittances. 
During 1943-44 the dollar position became easier and the 
remittances of profits by American firms were freed from 
restrictions. In the case of other remittances in U. S. 
dollars as also remittances in certain other currencies, the 
restrictions were relaxed. In February 1944, the entire 
French overseas Empire not under enemy occupation 
became a single monetary area and remittances to it were 
confined to transfers through special sterling accounts 
known as French overseas accounts. 

(yif) Restrictions on travel : 

Restrictions on travel to places outside the sterling area 
involving disbursements of foreign exchange were imposed- 
On the 17th July 1943 the Government of India issued a 
notification prohibiting any person from proceeding outside 
India without a written permit issued by the Reserve Bank 
of India. The restriction did not apply to persons proceed- 
ing to countries adjoining India or to Iraq, Arabia, British 
East Africa and the United Kingdom. 

All these measures of exchange control were designed 
to subserve the general objective of war economy, namely, 
the fullest economic mobilisation of the country. Their 
main purpose was to raise the economic potential of Allied 
war effort by acquiring, conserving and utilizing in the best 
possible manner all resources in foreign exchange- Subsi- 
diary to this but no less essential was the introduction of 
every possible safeguard against the use by the enemy of any 
assets within the country. Other wider considerations have 
been the economising of shipping space by cutting out non- 
essential exports and imports, the working put of a system 
of priorities by which the more urgent trdfle transactions 
precede the less urgent and the conserving of productive 
capacity in countries like U- S. A. for essential war 

The various restrictions, regulations and scrutinies 
which make up the system of exchange control must 
necessarily cause a good deal of inconvenience to those 
engaged fti legitimate foreign exchange dealings. Their 


application may sometimes be associated with considerable 
redtapism t delay, favouritism and abuse. The general 
efficacy and effects of exchange control in India, as else- 
where, can be properly appraised only after some more time 
has passed but it is obvious that the successful operation of 
the system in war as well as in peace requires an extremely 
high degree of state interference with, and control of, all 
branches of economic life. The State not only prevents 
exporters from disposing freely the proceeds of their sales 
abroad but also allots the available supply of foreign ex- 
change according to criteria which it frames and modifies 
in the light of experience and necessity. 1 Its decisions 
regarding the apportionment of foreign exchange have a 
vital bearing on the whole economic organisation of the 
people. For, it may favour certain home industries, manu- 
facturers, or firms at the expense of others and bring about 
a redistribution of income among the different sections of 
the people and thus alter the entire economic set-up of 
the country. The effects of war-time exchange control may 
not be so apparent as of several other economic develop- 
ments but among the various elements that have gone 
towards the making of Indian war economy, exchange 
control has already found a prominent place- With the 
return of peace, the release of national economic systems 
from the zariba of restraints and controls and their freer 
inter-communication, the retention or relaxation of exchange 
control and the extent of it has to be listed among the 
most immediate issues to be faced. 




Among the various war-time developments in the sphere 
of Indian currency, the enormous expansion of currency over- 
shadowed all others by its spectacular character, its wide 
sweep and its direct impact on the daily life of the common 
man. Its actual effects were fairly serious but of greater 

1 For a short and objective account of the pre-war system of 
exchange control vide League of Nations : Report on Exchange Control* 


moment perhaps was the potential threat that it at one time 
held of disrupting the entire fabric of Indian economy. The 
analysis made of its underlying causes and the conclusions 
reached regarding its character and the extent of its serious* 
ness by different groups of thinkers in the country brought 
into sharp relief three conflicting points of view about the 
character, magnitude and consequences of currency 
expansion. These viewpoints were those of the economist, 
the Government and" the businessman. The weighty 
nature of this development as well as the contro- 
versy which it has provoked enjoins the most rigid 
adherence to facts and cautious analysis in dealing with it. 

Currency circulation volume and velocity 

The total effective supply of currency in India is consti- 
tuted by the amounts of Government of India (mainly one 
rupee) notes, Reserve Bank of India notes, rupee coin and 
small coin and demand deposits of Banks, combined with 
their rapidity of circulation. This total has to be picked 
to pieces to examine the change that has occurred in 
each constituent during the war and to obtain a correct idea 
of the magnitude of the total change. 

The Reserve Bank of India notes of the denominations 
of Rs. 2, 5, 10, 100, 1,000 and 10,000 constitute by far the 
most important part of currency circulation in India. 
Deposit currency not having developed in India to any 
appreciable extent owing to insufficient growth of banking 
and banking habits, bank notes and coin from the most 
widely used media of exchange. In August 1939, the total 
amount of notes (including Government of India notes of 
mainly Rs. 50 and Rs. 500) in active circulation stood at 
a little less than Rs. 179 crores. By March 1945 it had in- 
creased to Rs. 1085 crores, i.e., by over Rs. 905 crores or 
506 per cent. This phenomenal increase was, however, 


not accomplished by easy stages or at a steady and unifortio 
rate, as the following figures will show : 
Year Month Notes in circulation* 

(in crores of rupees) 

1939 August 179 

1940 February 240 
May 249 
October 229 

1941 January 245 
August 277 

1942 January 356 
August 474 

1943 January 593 
August 755 

1944 January 854 
August 927 

1945 January 1034 
June 1152 

In the first six months of the war, note circulation ex- 
panded at a more or less steady pace by about 60 crores ; it 
Increased further by another 9 crores during the next three 
months but fell off between May and October 1940 by 
about 20 crores, so that the net increase upto October 1940 
amounted to only 50 crores. From the level reached in 
October there has been an unbroken rise, the increase 
amounting to about 50 crores by August 1941, another 200 
crores by August 1942 and a further 460 crores by August 
1944. Between August 1944 and June 1945 another 225 
crores added to circulation, 

A different way of representing the increase is to divide 
it into units of 50 crores and set it against the approximate 
number of months in which it was accomplished. 


Magnitude of increase Period of months 

1st 50 crores September November 1939 3 

2nd December 1939 September 1941 22 

3rd October December 1941 3 

4th JanuaryFebruary 1942 2 

5th March May 1942 3 

6th June September 1942 4 

These figures are for the last Friday of each month and have been 
taken from statement XXXII of the Report on Currency and Finance for 
the year 1943-44 and the Monthly Statistical Summar of thf Reserve 
Bank. Figures from 1942-43 onward exclude Burma notes. 


Magnitude of increase Period No. of months 

7th 50 crores OctoberNovember 1942 2 

8th December 1942 January 1943 2 

9th February March 1943 . 2 

10th April May 1943 2 

llth June- July 1943 2 

12th August October 1943 3 

13th November December 1943 2 

14th January March 1944 3 

15th April September 1944 6 

16th ,, October November 1944 2 

17th December 1944 January 1945 2 

18th February March 1945 2 

19th April May 1945 2 

It is clear that after an initial briskness lasting for the 
first few months of the war period, the pace of expansion of 
currency considerably slackened, only to quicken once 
again from September 1941 and develop into something like 
a gallop from September 1942. Since then the only period 
during which some abatement in speed was noticeable was 
from April to September 1944. 

Turning now to the Government of India notes, they 
form only a negligible fraction of the note circulation and 
consist now mostly of one-rupee notes (issued since July 
1940) which occupy a peculiar position in the currency 
system in that while notes of bigger denominations are 
convertible into them, they themselves are not convertible 
into rupee coin and are treated in the assets of the Reserve 
Bank like rupee coin. 1 As the convertibility of notes of 
higher denominations into rupee coin has been considerably 
restricted during the war, the whole of the note-issue may 
be described as inconvertible for all practical purposes. 
Statistics for the one-rupee issue are not furnished separa- 
tely but are merged in those of rupee coin circulation. 

Besides the enormous expansion in the circulation of 
currency notes noted above, there has also been a large 

1 Government of India notes of the denominations of 50 or 500 are 
also in circulation, the Reserve Bank having decided not to issue such 


increase in the absorption of rupee coin as well as small coin 
during the war. The total absorption of rupee coin (includ- 
ing one rupee notes) from the outbreak of the war to the 
end of March 1945 amounted to Rs. 138 crores, being 
composed as follows : 

Year Rupee coin absorbed 

(in crores of rupees) 

September 1939 March 1940 19'53 

194041 33*23 

194142 718 

194243 44'93t 

194344 2314t 

194445 10'05t 

No less striking is the absorption of small coin (including 

half rupees) of silver, copper and nickel which amounted 

from the outbreak of war to March 1945 to Rs. 60 crores, 

the amounts absorbed in different years being as follows : 

Year Small coin absorbed 

(in crores of rupees) 
September 1939 March 1940 2'64 

194041 4'28 

194142 5-06* 

194243 lT64t 

194344 18'46t 

194445 19'20t 

Finally, the bank deposits, too, which form a significant 
part of the media of payment, have recorded considerable 
increase. The only deposits relevant in connection are 
those subject to cheque, namely the demand deposits. 
Figures for such deposits are available for the scheduled 
banks and are given for the war period below. The total 
increase in these deposits since the war started upto March 
1945 was about 460 crores 1 of rupees of which a little less 
than 300 crores are accounted for by the two years, 1942 
and 1943. 

* Excluding Burma for February and March 1942. 

-f Excluding Burma. 

1 Upto June 1945 the increase was Rs.494 crores. 


Year Month Amount of demand deposits 

(in crores of rupees) 

1939 August > 133'5 

1940 February 137*1 
May 140*2 
October 161'8 

1941 January 1692 
August 195*4 

1942 January 217*0 
August 2947* 

1943 January 3447 
August 437*8 

1944 January 5027 
August 584*4 

1945 January 608*4 
March 5967 

Velocity of currency circulation : 

Thus the increase in all the various media of payment 
up to the end of March 1945, that is, during practically the 
whole period of war totalled up to nearly 1565 crores of 
rupees of which note circulation accounted for 906 crores ; 
rupee coin, 138 crores ; small coin, 60 crores and bank 
(demand) deposits 461 crores. But to find out the really 
effective increase it is not enough to know the quantitative 
increase ; the rapidity of turnover of the media of payment 
must also be taken into consideration. Here, unfortunately, 
no reliable information is forthcoming and while an approxi- 
mately correct idea of the velocity of circulation of bank 
deposits can be formed from the Clearing House Returns, 
the velocity of note circulation remains wholly a matter of 
conjecture. Jfhe velocity of bank deposits distinctly declin- 
ed during the five years from 1939-40 to 1944-45 as showp 
in the last column of the table below 1 : 

* Burma figures have been excluded since February 1942. 

1 It may be noted that while the figures in column 2 are for 
scheduled banks only, those in column 3 include the value of cheques of 
other banks also* 


(7n crores of rupees) 

Period Average demand Total Clewing Number of 

deposits House Returns times 3 to 2 

12 34 

193839 123*8 1,929 15'6 

193940 132*6 2,211 167 

194041 155*8 2,019 13*0 

194142 201-9 2,569 127 

194243 306*3 2,773 91 

194344 456'3 4,349 9'5 

194445 584'8 5,279 , 9*0 

It may be inferred from this in a rough and general way 
that the rapidity of note circulation also showed a similar 
decline- Among the several reasons that can be adduced 
for this decline in the activity of money, probably the fore- 
most is the strongpropensity towards hoarding of rupee 
and small coin engendered by the uncertain conditions of 
war- To this has been added the higher preference shown 
by the people, banks and business houses for liquid positions 
and, consequently, for holding idle cash balances. The 
plethora of money in the money market combined with a 
paucity of suitable outlets for investment has been another 
contibutory factor. 

Currency Circulation and prices : 

Contemporaneously with the heavy expansion in currency 
circulation, tempered as it has been by a somewhat dimini- 
shed velocity, there has occurred a marked rise in the 
general level of prices. Prices began to rise as soon as the 
war broke out and the first four months witnessed a strong 
upthurst of the price level. After that there was a break 
and by July 1940 prices had subsided to a little higher than 
the pre-war level. Soon after, however, theylfresumed their 
upward movement which became progressively quicker and 
steeper with the passage of time. There was a short period 
extending roughly from October 1943 to April 1944 during 
which the rise in prices was not only arrested but was 
actually converted in to a fall ; but from May 1944 prices 
began moving slowly upwards. In the table below, the 



index numbers of prices, note circulation and demand 

deposits have been shown in juxtaposition. 


Calcutta Bombay 

Year Month Note Demand (August 
Circulation deposits 1939=100) 
(in crores of rupees) 


























(July Advisor's 
1939=100) (Week 

ended 19th 
Aug. 1939=100) 



179 136 300 103 IDO'3 

236 128 137 135 138*3 

238 139 130 128 133*2 

23P 143 114 115 1121 

229 162 121 115 1121 

245 169 121 117 114'8 

277 195 151 144 1425 

356 217 155 184 145'0 

474 295 192 228 1611 

593 345 250 255 195*6 

755 438 345 258 2361 

782 466 334 244 24V5 

882 524 300 2321 

897 535 207 2346 

1034 608 299 - 250'3 

1085 * 597 306 - 247'8 

Thus while note circulation increased upto the end of 
January 1945 by 478 per cent 1 and demand deposits 347 per 
cent, 2 the general level of prices shows, on the average, an 
increase of 200 per cent. It may be pointed out that the 
index numbers of prices, being based on control prices, do 
not take account of the much higher black maiket prices 
prevailing for several commodities and, therefore, underrate 
somewhat the actual rise*in prices. 

The facts set out above may now be summed up in three 
plain statements : 

1. The various constituents of the monetary circulation 
recorded a steep and progressive rise. 

2. The decline in the activity of bank demand deposits 
suggested a general fall in the velocity of circulation of 

3. The general level of prices showed a large increase 
but was outpaced by the increase in money supply. 
Inflationcharacter and development 

It was Ihis simultaneous occurrence of the expansion of 
currency and the rise in prices that flung into focus the 

fFigute for September 1943. After October 1943, the index number 
was discontinued. 

jFigurenot available. 

lUpto June 1945 by 506 per cent. 

1 Upto June 1945 by 362 per cent. 


issue of inflation. The co-existence of rapidly expanding 
currency and sharply rising prices furnishes under any cir- 
cumstances a strong prima facie evidence of the existence 
of inflation but when a casual relationship can be established 
between the two by a reference to all the attendant circum- 
stances, the evidence becomes irresistible and the conclusion 
inescapable that inflation exists. The inflation issue in India 
had during the years 1943-45 become the pivot round which 
every discussion of Indian war economy revolved and no 
account of wartime currency developments which fails to 
give it a prominent place can be really complete. 

Any discussion of the inflation issue in India gets down, 
sooner or later, to four basic questions : first, what is infla- 
tion'? second, what evidence is there that it exists in India ? 
third, to what extent is it serious in magnitude and grievous 
in consequences ? fourth, how can it be prevented or the 
severity of it effects mitigated ? 

There would appear to be two ways of looking at infla- 
tion : as an inflationary issue and as an inflationary situa- 
tion. 1 An inflationary issue of currency may be said to occur 
when purchasing power whether,, in the form of paper 

currency or bank credit is expanded beyond the needs of 
trade, employment and production. That is to say, so long 
as the expansion of purchasing power occurs in response to 
the expansion of trade, employment and production or 
evokes such expansion, it may not be called inflationary in 
character. It follows that an increase in purchasing power 
may hot be described as inflationary so long as it is leading 
towards fuller utilization of resources, i.e. towards a state 
of full employment. Inasmuch as this increase will spend 
itself in bringing dormant and idle resources into activity, 
it will not result in a rise in prices until the state of full 
employment is reached. This general statement may, 
however, be qualified by the proviso that a rise in prices of 
a sporadic character may occur, even before the state of 
full employment is reached, due to the development of 
1 A short explanation of the phenomenon of inflation has already 
been given in the Introduction (pp. 11-14). 


bottlenecks, impediments and frictions which hamper the 
mobility of resources- War usually leads to the stimula- 
tion, energising and mobilisation of resources, to the taking 
of 'slack' and the use of idle capacity. The expansion of 
economic activity it brings about may, not unreason- 
ably, be compared to the bpom phase of the business 
cycle. It obviously demands an expansion of currency 
to facilitate and finance it- But as soon as the ex- 
pansion has performed this task, it becomes inflationary. 
It is necessary to point out here that the state of full 
employment in the present context means not necessarily a 
state in which every unit of productive resources every 
man, plot of land and machine is employed but one in 
which the fullest employment possible under the circum- 
stances of a country has taken place- 

An inflationary situation, on the other hand, may 
develop during war even when some of the resources are 

unemployed, i.e. when there has been no inflationary issue 
as such. This will happen when the total stock Of purchas- 
ing power is not properly bifurcated so as to correspond 
to the volume of goods and services required for war 
purposes and of those required for civil consumption. 
The increased income accruing from the increased employ- 
ment of labour and other resources then exerts its pressure 
on the limited supplies of goods of civil consumption raising 
their prices. To have a clearer picture of this situation, 
the economy of a country during war may be visualised as 
having two sectors the war sector and the civil sector. 
Prosecution of war involves the use of a steadily increasing 
proportion of a country's real resources for military needs 
and of a steadily diminishing proportion to provide for civil 
consumption. An expanding war sector and a contracting 
civil sector of economy give a new twist, as it were, to a 
country's economy and the total money-supply, if it is not 
to become a disturbing factor, must facilitate and faithfully 
interpret this twist. In other words, purchasing power must 
be drained off from the contracting civil sector by taxes, 
loans or such other means and poured into the expanding 


war sector. The penalty for the inability to do it is the 
development of inflation. 

Now to know whether inflation has developed in India 
arid if so, in what form, two enquiries have to be made. It 
is necessary, on the one hand, to ascertain whether the ex- 
pansion of currency has gone beyond the requirements of 
economic activity or has been merely evoked by the latter 
and on the other, to find out if the government has been 
pursuing a lenient or wrong budgetary policy is not denud- 
ing the civil sector of economy of the surplus purchasing 
power flowing into it. The first enquiry leads to an examin- 
ation of the relation between currency expansion and war- 
time production, trade and employment and the second to an 
analysis of the methods and policy of war finance. 

Inflation in the sense of an inflationary issue of currency 
can be said to exist in India only in the expansion of currency 
has outpaced the demand for it for sustaining economic 
activity at a higher war-time level. It is well known that in 
1933 when war broke out, Indian economy was still suffering 
from the after effects of the Great Depression of 1929-33. 
There were not only large reserves of man power in an idle 
or semi-idle state which could be put to work but there was 
also very considerable margin for stepping up both agricul- 
tural and industrial production. Great hopes were aroused, 
therefore, when the war broke out of the inauguration of a 
new era of economic prosperity characterised by an all 
round economic development. But it was not long before 
the collapse of France and its sequel in May-June 1940 
damped those hopes by causing a big loss of markets for 
Indian agricultural produce OR the European continent and 
depressing prices in India. 1 It was not until October 1940 
that the psychological effects of this setback wore out and 
fresh advance in production and prices was resumed. 
After this period, Indian economy was subjected to 
opposite sets of forces, one tending to stimulate its expansion 

1 The total value of the exports for which mafkets were lost was 
estimated at the pre-war level of prices to be Rs. 29 crores. (Report by 
Dr. T. E Gregary and Sir David Meek, 1940, p. 14.) 


and the other the hamper it. The first set included such 
factors as bountiful harvests, the increasing tempo of war, 
the steadily growing volume of war orders to Indian indus- 
try, heavier internal demand due to increasing money 
incomes coupled with the curtailment of imports, and lastly, 
the gradual transformation of India into a vital supply base 
for the Allied forces in the Middle and Far East. The 
second set comprised such factors as the growing strain on 
the available shipping space and the consequent difficulty of 
sending out exports and obtaining some vital imports, in 
particular the difficulty of getting machinery and machine 
tools; curtailment of road transport due to petrol shortage 
and heavy pressure on rail transport ; the lack of clear 
insight on the part of the framers of economic policy into 
the nature and magnitude of forces at work ; and above all, 
the lack qf foresight and perhaps also of the will to draw 
up and execute with public cooperation a comprehensive 
and co-ordinated plan to deal with the new forces. The 
net effect of all these forces at work has been an expansion 
of economic activity which falls far short of both the needs 
of the country and of the opportunities opened up by the 
war. Statistics of agricultural and industrial production 
available at present (and set out in the form of indices in 
the three tables below) do not support any estimate of 
more than 20-25 per cent increase on the average in India's 
production during the war. 

Indices of Agricultural Production 
1938-39 1939-40 1940-41 1941-42 1942-43 1943-44 




















































Indices of Agricultural Production Cont.) 
1938-39 1939-40 1940-41 1941-42 1942-43 1943-44 

Caster seed 














Raye and 
















Indices of Industrial Production 1 

Commodity . 1938-39 1939-40 1940-41 1941-42 1942-43 1943-44 

P'9 iron 100 116*6 125*6(e) 130'3(e) 120*2(e) 125'5(e) 

Steelingots 100 109'5 122'8(e) 1387(e) 127'2(e) 131'6(e) 

Finished steel 100 1157 1377(e) 150 7(e) 150'1(e) 150'5(e) 

Cotton twist and yarn 100 94'8 103'5 12VO 1177 128'9 

Cotton piecegoods 100 94'0 100*0 105'2 96'1 114'4 

100 182-1 149*5(e) 119'2(e) 140'4 159*6 

100119-6148*1 153'1 1097 121'3 
100 104-3 109'8 78'4 70*4 70'4(e; 

General Average ^ 100 117M 127'6 124*5 116'5 125'3 

If Simple Arithmetical (e) Estimated. 

"Capital" Index of Industrial Activity * 
Items 1938-38 1939-40 1940-411941-421942-43 1943-44 

Indian cotton consumption 10D 94*9 106*5 124'8 f28'2 139*0 

Jut^e manufactures 100 105'1 9VO 100'2f 96' 7f 81*8f> 

Steelingots 100 109'6 1227 1387(e) 127*2(e( 131'6(e 

Pig iron 100 I17'0 125*6 130*3(e) 120'2(e) 125'5(e) 

Paper 100 118*1 1467 154' 4f 123'Of 118*3^ 

CoaJ 100 101*1 104-8 98'1(e) 96'5(e) 93'9(e) 

Rail and river borne trade 100 105*7 102'3 1007-j- 887f 90'2f 

Cheque clearences 100 993 89'1 91'8| 69'Ot 707 

Genera/ Index 100 102-4 105'6 110'4f 97'9f 98'5f 

t Provincial. (e) Estimated 

* Simple arithmetic average. 

Figures of production for 1944-45 not being available for a number 
of industries, index for 1944-45 has not been given but as production 
declined in several industries such as paper, cotton textile etc,, the index 
for 1944-45 would be very likely lower than thatfor 1943-44 

* Based on the table in Capital May 1945. 


Some more data which unfortunately are not available, 
particularly of employment and internal trade are necessary 
for correlating expansion of currency with economic 
activity l But even with such data of production and prices 
as are available it is hard to escape the conclusion that the 
supply of currency has far outrun the demand for it. 

It is, of course, difficult to trace the relationship between 
supply and demand since the outbreak of war and to say 
exactly when currency expansion took the lead and upset 
the balance between the two- The general level of prices, 
the rise in which has been chosen as the most obvious 
manifestation of inflation, was by no means in the normal or 
the optimum state at the outbreak of war. The initial rise 

in agricultural prices after the war was indeed welcomed as 
a well-deserved recompense to the agriculturist for the 
hard days he had known. By the end of the second year 
of war, note circulation had gone up by a little more than 
50 per cent and prices by a little less than 50 per cent. 
Considering that the velocity of circulation of money had 
declined somewhat and a number of factors such as higher 
charges of labour, raw material and transport were tending 
to raise cost of production and therefore prices and consi- 
dering a'lso that the rise in prices represented to some 
extent a much needed measure of reflation or 'pump- 
priming/ the situation at the beginning of the third year 
of war could not be pronounced to be very perturbing. 
Note circulation and prices, however, were being pushed 
forward by the dynamic urge of war expenditure. In the 
third and fourth years of war currency expansion went 
forward at a breath-taking pace causing a veritable price 
flurry. Every addition to currency now represented a fresh 
draft on the real resources, and, owing to the resulting rise 
1 It has been pointed out by Mr. G. D. Birla that the volume of 
transactions which are done in cash has increased a good deal during the 
war. Moreover the number of stages through which commodities have 
to pass has also increased under the wartime system of selling and buying 
(Cf .his Inflation and Scarcity, p. 13). This would mean that the econo- 
mic activity for which currency was required had greatly expanded. 


in prices, each successive dose of currency had to be followed 
by a larger one to Vake off 1 the same amount of real re- 
sources. As more and more real resources w:ere absorbed for 
the prosecution of war without corresponding additions 
being made to them, the already low standards of living were 
undermined further and by the middle of 1943, food and 
cloth the two vital necessaries of life became so scarce 
as to be almost unobtainable for the vast majority of 
people. Deaths by ghastly starvation occurred in the streets 
of Calcutta in August 1943 and in despair it was asked (by 
inverting Adam Smith's well-known dictum) if defence 
was after all better than indigence. Clearly, a big 
inflationary issue of currency had been under way piling up 
heavy burdens. 

This inflationary issue might not have led to the deve- 
lopment of what has been termed earlier, an inflationary 
situation if strong measures had been taken from the ' very 
beginning to bring the volume of purchasing power in the 
war sector and civil sector of economy into some correspon- 
dence with the respective amounts of real resources in the 
two sectors. While the remedy for tLe inflationary issue 
was an expansion of the volume of goods and services offered 
against money, the prophylactic against the onset of an infla- 
tionary situation was a sound system of war finance. The 
effects of the inflationary note issue could be mitigated by 
expanding production ; given the inflationary issue, no 
matter how caused, the situation could be retrieved by 
drawing off the purchasing power running in an ever 
swelling stream into the civil sector and pressing on the 
limited supplies of real resources. But the economic policy 
of the Government did not bring about the former and their 
peculiar system of war finance failed to achieve the latter- A 
discussion of the Government's policy relating to 
production, involving as it does an examination of their 
attitude towards Indian industry and of their measures 
for increasing food supply, will stray into many fields that 
have no direct relation to currency. 1 . But an expatiatory 

1 For a short critique of the Government's industrial policy during 
the war, refer to my Review of Indian Fiscal Pohcy, Section VI. 


treatment of the system of war finance which is really the 
fons et origo of both inflationary issue and inflationary 
situation is both necessary and relevant 

War Finance magnitude and methods 

The amount of defence expenditure that India has to 
bear is governed by the provisions of the Financial Agree- 
ment reached between the British Government and the 
Government of India shortly after the outbreak of war and 
brought into force with retrospective effect from 1st April 
1939. By the terms of this Agreement the British Govern- 
ment is to implement the programme laid down by the 
Chatfield Committee for the modernization of Indian army 
and involving a capital outlay of Rs. 46 crores. 1 The ex- 
penditure on defence measures undertaken by India and 
debitable to Indian revenues has been reduced to a formula 
and it consists of the following items : 

0) a fixed annual sum representing the normal net 
effective costs of the army in India under peace 
conditions, fixed at Rs. 36*77 crores, 

On) an addition to allow for rise in prices, 

(???) the cost of such war measures as are undertaken 
by India in her own interest such as mobilisation 
of Indian Territorial Force and Auxiliary Forces, 
measures of port and naval defence etc., and 

(iv) a lump sum payment of one crore of rupees to- 
wards the .extra cost of maintaining India's 
External Defence Troops overseas. 

To these items of expenditure have to be added the 
non-effective charges t-e., pensions and gratuities paid to 

1 This Committee was appointed with Lord Chatfiey as chairman 
shortly before the war to go into the whole question of modernization of 
Indian army and its recommendations had been accepted by both the 
British Government and the Government of India, 


personnel or the defence services and their dependants. 
An agreement regarding the apportionment of these 
charges between His Majesty's Government and 
Government of India was concluded in 1944-45- The 
liability of India for surplus war stores will be determined 
by negotiation at the end of war. 

Any expenditure in addition to the sum total of these 
five items, though it may be immediately borne by India, will 
be eventually recovered from the British Government. 

Proposals for revising the basis of the allocation of 
defence expenditure between the two countries were made 
by the British Government towards the middle of 1942 but 
the Government of India successfully resisted them. The 
original agreement, therefore, stands, though a new 
interpretation of some of its provisions has led to larger 
expenditure being debited to India's account. 

The defence expenditure of India was bound to record 
an increase with the extension of the scale and the 
acceleration of the intensity of hostilities but the extent to 
which the increasing tempo of the war has upset the 
estimates of the Finance Member of the Government of 
India was somewhat unexpected. Upto March 1940, the 
increase in expenditure attributable to the war did not 
exceed Rs. 4 crores and the improvement in revenue more 
than covered it- For 1940-41, the total defence expenditure 
was estimated at a figure of Rs. 53*5 crores in March 1940, 
a little over Rs. 68 crores in November 1940 and at a little 
over Rs. 72 crores in March 1941. For 1941-42, the defence 
expenditure was estimated at Rs. 84 crores in March 1941 
but the revised estimate one year later exceeded this figure 
by more than 18 crores. For 1942-43, the expenditure was 
estimated #t Rs. 133 crores but the accounts for the year 
yielded a figure of Rs. 214 crores excluding capital charges 
or over Rs- 267 crores (or about 75 lakhs per day) including 
the capital charges. For 1943-44, the defence expenditure 
exceeded estimates by about Rs. 96 crores. The table given 


below shows the magnitude of the defence expenditure for 
1943-44 (actual), 1944-45 (budget and revised) and 1945-46 

1943-44 1944-45 1944-45 1945-46 
(Account) (Budget) (Revised) (Budget) 

Revenue 358*4 376'6 2972 394'2 


portion 374 24'6 59*4 17*8 

Total 395'8 301*2 456*6 412'0 

To this purely defence expenditure must be added the 
civil expenditure, both central and provincial, directly attri- 
butable to war in order to know the total outlay on defence 
measures debited to revenue. The following table gives 
the total expenditure on defence measures from April 1939 
to March 1945 : 

(in crores of rupees) 

Central defence expenditure (including 

expenditure on capital account) 1346*71 

Central civil expenditure directly attri- 
butable to war 178*40* 

Provincial expenditure directly attribut- 
able to war 275*68* 

By far the most important item in the expenditure arising 
out of the war which is not* included in the central budget 
but without which no computation of the mofiey cost of war 
to India would be complete is the expenditure incurred in 
India on behalf of British and other Allied Governments. 
No figures about this expenditure have been furnished by the 
Government but some measure of it can be obtained from 
the total sterling payments made on this account by the 
British Government which amounted for the war period 
upto 31st March 1945 to Rs. 1292 crores. 1 War expenditure 
recoverable from the British Government has been esti- 
mated at Rs. 439 crores for 1944-45 and has been placed for 
the whole of the war period upto March 1945 at nearly 
1394 crores of rupees. 

*These figures are for the total increase in central and provincial 
civil expenditure during the war and are found by deducting from the 
estimated total expenditure from 1939-40 to 1944-45 expenditure on the 
basis of 1938-39. 

1 Report on Currency and Finance, 1944-45. p. 38. 



Thus a total amount of about 2700-2900 crores of rupees 
exclusive of the extra expenditure of Provincial Govern- 
ments represents the total direct money cost to India during 
the war period upto March 1945. Of this, Rs. 2500 crores 
may be taken as the direct financial burden of the war. 

How has the money cost of war been met ? The methods 
used by the Government to meet it may be divided into 
(a) taxation (6) borrowing (including the saving schemes) 
and (c) currency inflation. While taxation and borrowing 
have enabled the Central Government to balance their 
budgets, they have not sufficed to cover the total money 
cost of war mentioned above. It follows that the gap 
between the total expenditure and the total income (accru- 
ing from taxes and loans) has been filled up by the issue 
of fresh currency. 

(a) Taxation. It is significant that to cover the additional 
expenditure arising from the first impact of the war on 
India, the Government turned to taxation, directing atten- 
tion first of all, to excess profits of business. It was some 
months later, in June 1940, that they launched their borrow- 
ing programme. The extent and range of new* taxation 
during the war are shown below : * 

Levied for the 



first time or 




Excess profits tax 


50 per cent 

Sugar excise 


Rs. 2 per cwt. to 

Rs, 3 per cwt. 

Sugar import duty 


By Re. 1 pet cwt. 

Excise duty on motor 

increased , 

-flOf- to -fJ2/- 


per gallon 

Surcharge on incoire-tax 


25 per cent 

including super tax 

and corporation tax 

From la. to 1-^a. 

Postal letter and packet 


for the first tola. 


From $ps. to 9ps. 

for parcels. 

Surcharge on telegrams 


-/I |- on ordinary 

and -/2/- on 

Surcharge on telephone 




10 per cent 





Levied for the 
first time or 



Excess profits tar 


From 50 to 66 2/3 

per cent 

Surcharge on income 


From 25 to 33 1/3 


per cent 

Excise duty on matches 


By 100 per cent 

Import duty on artifi- 


Specific duty from 

cial silk yarn and 

-/3/- to -/5/~ 


per Ib. 

Eycise duty on pneuma- 


10 per cent ad- 

tic tyres and tubes 

valor ern 




Exemption limit 

lowered to 

Corporation tax 


Rs. 1.500 
To 1-J a. in the 


Surcharge on income- 
tax and super- tax 


From 33 1/3 to 
roughly 50 per 


Emergency surcharge 


20 per cent 

on import duties 

(raw cotton, salt anci 

mofor spirit exempt- 



To 15 as. per 

Excise duty and import 


duty on motor spirit 


To 3 as. 7{ ps. 

Excise duties on kero- 

per 02. (silver,) 

sene and silver 

To 0-3-9 per im- 

perial gallon. 

Postal letter rate 
Rates for telegrams 


From 1 ^to 1| as. 
From -/10/~ to 
-/12/- for or- 

dinary and 

Re. 1-4-0 to 

Re. 1-8-0 for 


Surcharge on trunk tele- 


From 10 to 20 

phone calls 

per cent 


Telephone rentals 

Income-lax surcharge 
and super-tax 


By 16 3/8 per cent 
On incomes above 
Rs. 5,000 

Excise duty on tobacco 


Ranging between 

ptoduced and manu- 
factured in India 

la. and Rs. 1-12 
per Ib for 

ed and 2as. 

and Rs. 6 for 

Excise duty on Vanas- 


manufactured . 


Rs. 5 per cwt. 







Postal and telephone 
rental rates 

Income tax 

Surcharge on Income- 

Surcharge on supertax 

Corporation tax 
Surcharge on customs 

Excise duty on unmanu- 
factured tobacco and 
on cigars and che- 

Excise duties on tea, 
offee and betelnuts. 

Surcharge on income-tax 

Excise duty on high 
class tobacco 

Custom duty on tobacco 
Postal parcel rate and 
surcharge on tele- 
phone rentals and 
trunk call fees. 

Levied for the 
first time or 



raised on in- 
comes above 
Rs. 10,000 









Letter rate to la- 
for each tola 
after the first. 
Parcel rate to 
6as. for first 
40 tolas. Tele- 
phone surcharge 
from l/6to 113 

Taxable minimum 
raised to 
Rs. 2,000 

By 2 pies on in- 
comes between 
Rs, 10,000 and 
Rs. 15,000 and 
by 4 pies above 
Rs. 15,000. 

By 6 pies on 
incomes between 
Rs. 35,000 and 
Rs. 2 lakhs. 

From2as. to 3as. 

From 20 per cent 
to 50 per cent 
in the case of 
tobacco and 

According to a 

complicated scale.. 

2as. per Ib. 

On slabs of in- 
comes above 
Rs. 15,000. 

At varying rates 

The total taxation revenue from 1939-40 to the end of 
March 1945 has been reckoned at Rs. 827 crores of which 
direct taxes account for Rs. 443 crores and the main indirect 
taxes at Rs. 384 crores, 1 

1 Explanatory Memorandum to the Budget for 1945-46, p. 23. 


There are two other measures that were adopted after 
the outbreak of war to strengthen the revenue position of 
the Government. Firstly, the Distribution of Revenues 
Order, 1936 (embodying the Niemeyer Award) was amend- 
ed to provide that during 1939-40, 1940-41 and 1941-42, the 
Central Government would retain out of the distributable 50 
per cent of the income-tax proceeds an amount of Rs. 4 
crores. 1 Secondly, the railway fares and freights were 
raised and the moratoriun on the payment of the arrears 
of railway contribution to general revenues continued till 
1941-42 so that a larger contribution from the railway reve- 
nues to general revenues was rendered possible. In 1942 all 
the arrears of railway contribution were paid off and, there 
fore, in 1943, interim wartime changes in the Railway Con- 
vention of 1924 were adopted so as to permit a substantial 
contribution by the railways in consonance with the war 
needs of general revenues. The railway contribution to 
general revenues during 1944-45 and 1945-46 was stabilised 
at Rs. 32 crores and for the war years has been as follows :- 

(In crores of rupees) 

1939-40 4*33 

1940-41 1216 

1941-42 2017 

1942 43 2013 

1943-44 37-64 

1944-45 (R.E.) 32 V 00 

1945-46 (B.E.) 32*00 

Total ... 158'43 

(b) Borrowing. The borrowing programme of the 
Government, described as the Indian Defence Saving Move- 
ment, was put into effect from June 4, 1940 and to begin 
with comprised Three-year Interest* free Defence Bonds, 3% 

Six-year Defence Bonds and ten-year Defence Savings Certi- 
ficates. The Six-year Defence Bonds were issued in two 

series, the first with effect from the 10th June and the 
1 This pro vision wa extended to 1942-43 and subsequent years in 
terms of the direction of Governor-General, 


second to which conversion from 5% 1940-43 Loan was 
allowed, from the 1st August, 1940. The sale of these Bonds 
was discontinued from the 25th January 1941 and their place 
taken by 3% Second Defence Loan 1949-52 was issued with 
effect from 1st February. From 1st April, 1941, a new scheme 
of Post Office Saving Bank Accounts to facilitate popular 
savings was brought into operation. The amounts in these 
Accounts are repayable not on demand but; one year after 
the end of war, the rat;e of interest carried by them being 
2-1/2 per cent i.e., one per cent higher than the existing rates 
on Savings Bank Accounts. On the 14th February 1942, 
the 3 per cent. Second Defence Loan was closed and on 
the 4th July 1942, the 3 per cent Third Defence Loan was 
issued in the form of a reissue of an earlier Loan first issued 
in 1935. On the 1st October 1942, a special issue of 3 
per cent Loan 1963-65 was made in connection with the 
arrangement made for the funding of sterling obligations in 
respect of railway annuities. Subscriptions to the Third 
Defence Loan, were closed from 1st July 1943 and a Fourth 
Defence Loan was issued in its place. From 1st October 
1943, it was decided to close the issue of Ten-year Defence 
Savings Certificates and to substitute for them a new 
attractive scheme of Twelve-year National Savings Cer- 
tificates. The rate of interest allowed on Post Office 
Savings Bank accounts was also raised from the same date. 
On 22nd October, the 3 per cent. Funding Loan 1966-68 
of Rs- 25 crores was floated and in January 1944 a special 
issue of Rs. 50 crores of this loan was created. On the 31st 
March 1944 the Fourth Defence^ Loan was closed and a new 
3 per cent Victory Loan was issued from 1st April 1944. 
Other loans floated during 1944-45 were a special issue of 
Loan 1948-52, a third issue of Funding Loan 1966-68 and a 
Second Victory Loan. 

Among the other items in the borrowing programme, the 
most important is the sale of the rupee counterparts of 
those sterling loans which were repatriated under the 
voluntary and compulsory repatriation schemes. 1 
3 V\de 6. 


The total amount subscribed to all Defence Bonds and 
Loans, the Defence Savings Certificates and Defence Savings 
Bank Account was upto the 31st March, 1945 Rs. 85775 
crores, being composed as follows 1 : 

\ (In crores of rupees) 

Interest-Free Defence Bonds ... 2*90 

Three Per cent. Defence Bonds 

(1) First Series ... 71 

(2) Second Series ... 64"43 
Three Per cent. Second Defence Loan 5916 
Post Office Savings Bank . . . 1*89 
Post Office Cash Certificate's ... 21'21 
Defence Savings Certificates ... 6 42 
National Savings Certificates ... 28*03 
Defence Savings Bank ... 8*33 
Three Per cent. Loan 1951-54 ... 54*80 
Rupee counterparts (net investments) 224"26 
Three Per cent. Loan 1963-65 ... 30*2 1 
Three Per cent- Funding Loan 1966-68 110"12 
Three Per cent- Loan 1953-55 . . 114*58 
Five-year Prize Bonds - 4*15 
3 per cent Victory Loan 112*82 
Second Victory Loan . . 6' 15 
2| per cent. Loan 1948-52 . . JSO'OO 

Total* . . 85775 

In addition to this long-term borrowing, the Government 
of India also increased their short-term borrowing in the 
form of Treasury Bills and Ways and Means Advances 
from the Reserve Bank of India. The total amount of 
outstanding Treasury Bills and Ways and Means Advances 
increased, from Rs. 46*3 crores at the end of 1938-39 to 
Rs. 2647 crores at the end of 1942-43 but dropped due to 
the successful borrowing operation of the Government to 
Rs. 867 crores at the end of 1944-45, i.e., there was a net 
increase of Rs. 40*4 crores. To a substantial extent, the 
Treasury Bills were merely substituted for the sterling secu- 

1 Report on the Currency and Finance, 1944-45, P. 63 


rides in the assets of the Reserve Bank's Issue Department 
and there was no additional issue of currency against them. 1 

The rupee debt of the Government has on account of the 
borrowing and sterling repatriation t operations increased 
during the war by nearly Rs. 800 crores (up to the end of 
1944-45) and the sterling debt was reduced by about Rs. 400 
crores, showing a net addition of Rs. 400 crores to India's 
total public debt. The rate of interest paid on the loans 
raised by the G3vernment has been kept low at about 
3 per cent due to the successful maintenance of cheap 
money conditions during the war. 

Saving Schemes. In their borrowing programme* the 
Government did not place much direct reliance on saving 
schemes, though a few of them were brought into opera- 
tion as auxiliaries of taxation or control measures. Three 
schemes, two of them voluntary in character, were intro- 
duced along with the changes made in 1942*43 .in the rates 
of income-tax, surcharge on income-tax and excess profits 
tax. Under the first scheme, income-tax leviable on incomes 
between Rs. 1,000 and Rs. 2,000 on the excess over the fim 
Rs. 750 of total income was not to be levied if the assessee 
exercised the option of depositing a prescribed sum in a 
Savings Bank Account, The prescribed amount was one 
rupee for every 25 lupees by which the total income 
exceeded Rs. 750 and was, therefore, approximately 1*1/4 
times the 'amount of tax to which the assessee would 
otherwise be liable. Under the second scheme, which was 
compulsory in effect, the incidence of the newly introduced 
rates of surcharge on incomes not exceeding Rs. 6,000 was 
mitigate^ by funding 1/2 per cent of the assessee's total 
income for his benefit a,nd providing for its repayment to 
him after the war. Under the third scheme, the Government 
would contribute an amount upto 10 per cent of the 

* This was pointed out by the Finance Member during the course of 
his Budget speech (February 1943) probably in reply to Prof. Vakil's 
statement in his The Walling Rupee to the effect that: the Government was 
obtaining rupee finance by means of Treasury Bills and thus engineering 
* inflation in its naked form 1 Vakil's well-reasoned rejoinder, in th 
first i*sue of the Eastern hconcmist (dated 22nd May* 1943), does nor 
seem to be very convincing on tnis poii\t. 


net excess profits tax (the rate of which stood at 66'2'3*per 
cent) provided the assesses deposited a sum equal to double 
this amount. The contribution placed in reserve by the 
assessee would be repayable within 12 months of the end of 
war while the contribution made by the Government would 
be paid out at such time and subject to such conditions as 
nrght be determined. This scheme, optional in character 
upto 17th May, 1943, was converted into a compulsory 
scheme by an Ordinance of that date and a deposit at the 
rate of 20 per cent of the excess profits tax, t-e. 13'1'3 per 
cent of excess profits was made compulsory for all assessees, 
the Government making their contribution at the rate of 
6'2/3 per cent. In 1944-45 the amount of the excess profits 
tax required for compulsory deposit was raised from 20 per 
cent to 19/64th in the case of companies and 17/64th in other 
cases, thus immobilising the whole of the excess profit 
remaining a-fter the payment of excess profits tax, income- 
tax and the super tax. A 'pay-as-you-earn' scheme, as it was 
called, for income tax collections was also introduced to 
provide for the temporary deposit of advance payments 
of tax on those incomes from which tax is not now deducted 
at the source, such as income from property, business, 
profession or vocation. The assessee has under the scheme 
the option to pay tax quarterly either on the basis of his last 
assessed income or his estimate of current earning. The 
sums thus collected are not treated as revenue but as 
deposits to be taken to revenue when the regular 
assessments are made. 

Lease-Lend aid. India was receiving goods and services 
from U, S. A. under the Lease-Lend arrangements and the 
value of these was estimated at Rs. 515 crores upto the end 
of 1944-45. Lease-Lend represented an innovation in the 
sphere of international finance during the war; the aid 
rendered under it was in the nature of foreign borrowing 
though it was not clear in what form the liability of the 
recipient would be discharged at the end of war. A direct 
agreement between India and U. S. A. concerning Lease- 
Lend was not concluded until May 1946 but India incurred 
expenditure on U.S. troops stationed in India and on various 
supplies and servicesReciprocal Lease-Lend aid, as it was 


called which was estimated upto the end of 1944-45 at 
Rs. 124 crores. A direct Mutual Aid Agreement between the 
Government of India and of Canada was signed during 
1944-45 entitling India to participate in the benefits of Mutual 
Aid accorded by the Canadian Government to the Allied 
Nations. This meant a small reduction of the order of 
Rs. 5 crores per annum in India's Defence expenditure. 1 

(c) Inflation. As was pointed out earlier, taxes and 
borrowing were not adequate to cover the total expenditure 
incurred by the Government of India in connection with 
defence measures. The Government had no doubt been 
able by these means to balance their budget but they were 
not able to draw to themselves sufficient purchasing power 
to balance their budget as well as meet the expenditure 
incurred by them on behalf of the British and Allied 
Governments. The question which naturally arises and 
which forms the core of inflation issue is : how was this 
expenditure met ? 

The question admits in a way of the simple answer that the 
British and other allied Governments were making payments 
to the Government of India in sterling and the Government 
of India were releasing the equivalent amount of rupees for 
the expenditure incurred by or on behalf of. these govern- 
ments. Further details worth mentioning about this process 
are that sterling accumulated in London with the Reserve 
Bank of India and was invested in sterling securities which 
were then lodged in the Issue Department of the Bank and 
formed the backing behind the notes issued in India. 2 The 
table on the next page brings out the increasing extent 
to which sterling securities supported the note issue during 
the war. 

In normal times any accumulated sterling in England 
could have been utilized for purchasing -and importing 
tangible goods and services as well as gold but this proce- 
dure was not found practicable for the duration of war. 
In effect, therefore, India extended to Great Britain a huge 
^Budget, 1945-46, Finance Member's Speech, para 14, 
1 For an illuminating account of the whple process, vide Sir C. D. 
Deihmukh'i Rotary Address (Commerce, 5th September, 1943). 






O- M 


-* 1 * QL) 
















^ S8 9 

Os ON CJs O% 
rH rH rH rH 




commodity credit which was to be repaid after the war, 
The amount of credit was obtained internally not so much 
by depriving those who had of the utmost they could give 
as by a process of nibbling at the paltry stocks and subsis- 
tence of those who had never risen very much above the 
poverty line. The investment of sterling balances in British 
securities made available large funds to the British Govern- 
ment who were to this extent able to avoid resorting to 
credit inflation. The release of corresponding amounts of 
rupees in India swelled the volume of currency circulation. 
It was thus that inflation was kept at bay in England and 
unleashed in India* The war entered, as it were, a minus 
item of goods and a plus item of note issue in India's 
national balance sheet and added, at the same time, a plus 
item of goods and a minus item of currency circulation in 
England's national balance-sheet. 

On a very rough appraisal of the relative contributions 
of taxes, loans and inflation towards India's war finance, it 
might be said that the share of each was one third With 
the intensified drive for borrowing, however, the share of 
this lucrative method of war finance was tending to in- 
crease steadily and that of inflation which had undoubtedly 
been high to decrease. 
Some Aspects of Inflation. 

Inflation 'and sterling balances, The relation between 
sterling balances and inflation may be viewed from three 
angles : firstly, the precise connection between sterling 
accumulation and currency expansion ; secondly, the extent 
to which the presence of large sterling assets and the 
possibility of their conversion into tangible goods in future 
could be considered an inflatiorf-damping factor ; and thirdly, 
whether in spite of the presence of these assets, Indian 
currency could be described as 'fiat money'. 

As regards the first, it was clear that sterling must 
accumulate with the Reserve Bank So long as the British 
and Allied governments made purchases in India and paid 
for them in sterling. But it was not inevitable that internal 
expansion of currency should result from the accumulation 


of sterling. If, for example, the whole of the purchases 
in India could be made by rupees obtained from Indian 
people themselves by taxes or loans, no additional currency 
needed to be issued at all against sterling accumulating 
in England. It was because the Government of India could 
not get hold of sufficient rupees to meet all their liabilities 
for expenditure by the normal means that they had recourse 
to the Reserve Bank machinery for obtaining rupee currency 
against sterling. Again, it was open to the Government of 
India, even if they were not receiving sterling, to secure 
additional rupee currency by the simple expedient of 
borrowing from the Reserve Bank against its own securities. 
44 Thus there is no natural or necessary relation between 
the growth of foreign assets and internal expansion or 
monetary inflation and the link between the two pheno- 
mena is optional. Inflation may, and generally does, develop 
without any growth in foreign balances and foreign balances 
may in theory grow without causing a corresponding 
degree of inflation." 1 

As regards the anti-inflationary effect of sterling 
balances, it was possible to exaggerate it. Just as the mere 
accumulation of foreign balances need not give rise to infla- 
tion, the mere presence of such balances need not counteract 
it. For inflation arises basically from the disturbance of 
currency economic activity ratio, though at a certain stage 
the lack of confidence in the currency may become an 
inflation aggravating factor. The backing of sterling 
assets behind expanded currency could possibly strengthen 
the confidence factor and could to that extent damp infla- 
tion but then there must be unshaken public faith in the 
future value and availability of these assets. 

The Manifesto issued by the twenty Indian Economists 
in April, 1943 characterised the inflation in India as 'deficit 
induced fiat money inflation*. The description might be 
generally correct but was not explicit on two points- In 
the first place, the deficit that had induced the inflation was 
not caused by a gap between the ordinary war -time ex- 
penditure and revenue of the Government of India, but 

* Rotary address of Sir (then Mr.) C. D. Dcshmukh, Governor of 
the Reserve Bank, 31st, August, 1943. 


by the extraordinary expenditure which it had been called 
upon to meet. Secondly, the notes going into circulation 
could be described as fiat money only if the sterling securi- 
ties against which that was issued were treated as worthless 
assets incapable of being converted later on into tangible 
goods and gold. 1 As a matter of fact, it is hard to find an 
exact precedent for the Indian inflation, and, therefore, 
difficult to classify it. It was inflation sui generis and could 
be treated as such. 

Inflation and Velocity of Currency Circulation* It would 
be difficult to deny that the fall in the velocity of circulation 
acted during the war period to some extent as an inflation- 
damping factor. It was, however, difficult to assess its 
existing magnitude or predict its future course. Figures of 
velocity of circulation have a limited utility as indices in so 
far as a large volume of payments during war-time is made 
in cash. This must be so more particularly when black 
markets are rampant and when the small incomes of those 
who keep no bank account increase. 8 But the broad trend 
suggested by the figures could hardly be doubted, though 
it could in no way full disquietude for the future. For 
lower velocity of circulation represents a reserve of im- 
mobilised purchasing power which, whenever it comes into 
operation, will be a factor of serious magnitude. 

Inflation and Social Justice. Inflation as a means of meet- 
ing the cost of war achieves no doubt the same objective as 
the two other methods of taxation and borrowing but it does 
so by effecting the most arbitrary and inequitable changes 
in the economic position of different classes and persons and 
by introducing into the economic system the germs of dis- 

Fiat money by its very definition circulates by the authority of the 
Government which regulates its issue and not by any intrinsic value of 
its own. It is doubtful if paper currency fully backed by and convertible 
into, *ay, gold immediately or proximately can be described as fiat 

money* (Cf. however, the opinion of Gadgil and Sovanl in their War 
and Indian Economic Policy; 1944, P, 240.) 

* B. C. Ghose ; The War and the Rupee, pp, 3 4, , 


temper, 1 The lessons of the havoc worked by inflation in the 
post war years of 1919-23 had been learnt so well by thought- 
ful men that when the war broke out, clearest warnings 
were sounded in belligerent countries like England against 
letting the spectre of inflation raise its ugly head. 1 The close 
bearing of the methods of war finance on the social distribu- 
tion of wealth also received firm emphasis, The 'deferred 
pay' scheme put forward by the eminent economist, Lord 
(then Mr.) J. M. Keynes, for England soon after the war 
aimed at greater social justice no less than at efficient 
finance of war. 3 In India, however, there does not seem 
to have been sufficient appreciation of the social and dis- 
tributional implications of war finance. The burdens im- 
posed by the war (and the gains accruing from it) cannot 
be claimed to have been aquitably distributed among the 
different sections of population. There are some groups 
who have been able to secure most of the gains and escape 
many of the burdens ; these include, broadly speaking, the 
bigger landlords, war contractors, profiteers and speculators. 
There are others who have not borne their proper share .of 
the burden and these cover all persons with large incomes 
including industrialists, bigger traders and highly skilled 
personnel in war employment. Then there are also groups 
about whom it cannot be said that their gains in 
1 Cf." Art endless period of rising prices destroys two very important 
social things ; it destroys the value of saving and it destroys the worker's 
standard of living*' (Gregory: Current Problems of International Finance: 

1 In England, the financial control has been very effective; for while 
the total Central Government expenditure rose from 3,340 million 
in 1940 to 5,782 million in 1943, the proportion of it covered by ordinary 
revenue rose from 37 per cent to over 50 per cent. A little more than 
half the expenditure was covered by savings of which small savings form- 
ed a considerable part. The extent of inflationary finance was extreme- 
ly small. (Economic Journal Dec. 1941 and Sept. 2943 and An Analy- 
sis of the Sources of War, finanee, London 1944.) 

* Summing up the advantages of the scheme the central feature 
which was the proposal for compulsory savings, Keynes observed: "It 
retains a itronger incentive to effort, gives less sense of sacrifice and in- 
deed require* less and spreads through the community the advantages of 
security which saved resources afford, far more widely than before. 1 ' 
(How to pay for the war, 1940, p. 44, ) 


the form of fresh or more lucrative employment have not 
been outweighed by heavier burdens imposed by scarcity, 
high prices etc. ; these include small landholders, tenants, 
small artisans and traders, domestic servants and the organis- 
ed industrial workers/ And finally, there are persons hav- 
ing more or less fixed incomes and low-paid workers, such 
as the salaried employees in Government or private employ- 
ment, professional men, unorganised industrial workers, 
pensioners and agricultural labourers who have been called 
upon to bear a disproportionately heavy share of the burden. 
Broadly and roughly, it may be said that the proportion of 
the country's real wealth which fell to the share of the low 
paid manual worker, the fixed income black-coat employee 
and the small producer had been diminishing while the pro- 
portion commanded by the big supplier and middleman, the 
war profiteer and speculator, the large investor and produc- 
er had been increasing. 1 

It may also be pointed out that Indian people, as a 
whole, with their low average income per head were called 

upon to bear under the existing financial arrangements an 
unbearably heavy burden. The burden was felt to be par- 
ticularly intolerable because the present generation was 
being called upon to bear almost the whole of it. The gains 

from the extinction of past debts and the growth of sterl- 
ing balances opened promising vistas for the future genera- 
tion but provided little relief to the present. 

Inflation and the Agriculturist. The severe criticism 

levelled by Indian economists against inflationary expan- 
sion of currency and the consequent rise in prices was treat- 
ed with scepticism by some representatives of agricultural 
interests. It was pointed out that the rise in prices had 
opened the sluices of prosperity for the agriculturists which 
might not be closed by committing the error of deflation. 
It is necessary to examine the point with special reference to 
1 One gain generally recognized to have accrued to landowners in 
some parr* of the country is the reduction or the complete repayment of 

*For the general effects of the rite in prices during the last war, see 
Babington Smith Comm/ttees Report, Pari.47. 


the Punjab which is generally considered to enjoy a higher 
degree of agricultural prosperity than many other Provinces. 
The agriculturists in India form such a vast mass that it 
would be foolish to try to cover them by a single general 
statement. There are some nine groups into which those 
connected with agriculture may be divided : the bigger, 
the middle and the smaller landowners, tenants, landless 
labourers, artisans, menials, traders and money-lenders. 
The line of division between the bigger, the middle and the 
smaller landowners, the smaller owner and the tenant, and 
the tenant and the landless labourer cannot be drawn very 
sharply. In the Punjab, the smaller, the middle and the bigger 
landowners would be those who own 315, 15 50 and 
above 50 acres respectively; those owing less than 2 3 acres 
would approximate in material status to smaller tenants 1 . 

No data are available as to how the nine groups have 
been affected by inflation and it is, therefore, impossible to 
measure improvement or deterioration in standard of liv- 
ing in quantitative terms, but some ad hoc enquiries regard- 
ing war-time changes in rural life would suggest some broad 
conclusions. The bigger landowner, by all accounts, has 
gained on balance, i.e , even after allowing for the rise in 
the prices of goods such as cloth etc., which he consumes- 

He has purchased more land or house property wherever he 
could or made investments in gold and ornaments. He has 
also been hoarding cash or alternatively, increasing his 
deposits with the post office or co-operative societies. He 
has also cleared off or considerably reduced his debts and 
redeemed mortgages. In real terms his position is much 
better than before the war. The middle landowner has 
also improved his material condition by reducing debt, 
redeeming mortgages, purchasing land or accumulating some 
cash, though not to the same extent as the bigger land- 
owner. The smaller landowner (who may at the same time 
be a tenant) who is little more than a subsistence farmer 
l The percentage of the bigger, the middle and the smaller owners 
in the Punjab is roughly 2'5, 10 and 38. The proportion of those below 
3 acres is about 50 per cent. As regards area held, the corresponding 
figures for the four classes are roughly 38'0, 28"0, 28*0 and 6'0 respectively. 


has both gained and lost and it is difficult to strike the 
balance. Whenever he had a surplus to sell, his money in- 
come has gone up and he has utilized it to pay off his old 
debts. 1 Whenever he could get the necessary materials, he 
has spent more on improvements in land such as sinking or 
repair of wells, better seed, implements, etc. and also on 
the purchase of milch cattle and improvement or extension 
of the dwelling house. He has also been able to pay up the 
government demand by parting with a smaller amount of 
his produce and to that extent jhas been enabled to retain 
and/or consume more. The supplementary occupations 
pursued by him have also fetched more and when a member 
or two of a family have joined the army, a small stream of 
money has flowed into the family from that direction. 
There has been a noticeable rise in the material standard 
of living in such cases, inasmuch as the newly-acquired 
money has been spent on the purchase of fountain pens, 
watches etc., and, in at least some cases, also on indigenous 
intoxicating beverages. The rise in the value of land has 
been utilised in some cases to sell a part of the holding to 
redeem the mortgage over another and a larger part- 
Against these, one must place, first of all, the higher prices 
of goods that enter into the cost of cultivation livestock, 
wood and iron for the plough and the sinking of the well The 
prices of articles of consumption cloth, kerosene, matches 
etc., have gone up, though it would be wrong to think 
that they have affected the agriculturist to the full extent 
of their rise because of his capacity to limit his wants or 
use substitute (village made) articles of .inferior quality. 
Transport both by road and rail has become more costly 
and the price of gold and silver which were used both for 
personal adornment and investment has increased. On the 
whole, it cannot be said that the small landowner has made 
any definite real gain during the war, though he has been 
able to extricate himself from a substantial part of his 
encumberances. Where he has had the misfortune to lose 
any of his cattle (whose prices have risen tremendously), 
his position has remained almost the same as before the war. 
i It may be mentioned here that agrarian legislation of 1934-39 had 
already enabled him to wipe off a part of his debt. 


As regards tenants, the cash contract tenant would gain 
when prices are rising but in the Punjab about 75 per cent 
of the area under tenancy is held by batai tenants (or share 
cropper). Moreover the cash rents have risen along with 
a rise in prices. As for the share-cropper, his position is 
in many respects similar to that of the small landowner, 
though it is weaker and less satisfactory. The crown tenant 
in the canal colonies appears, however, to have improved 
his position by acquiring proprietory rights over the land 
cultivated by him- 

The landless agricultural labourer has suffered heavily in 
some parts of the country such as Bengal on account of 
starvation as well as scarcity of cloth. He forms the sub- 
merged section of rural population and the tendency 
reported from some parts of the country for kind wages to 
be replaced by cash wages has exposed him more than 
before to hunger and want. In the Punjab, however, he 
does not seem to be worse off because the greater demand 
for his services in a period 'of labour shortage caused by 
recruitment to the army has led to a rise in wages almost 
proportionate to the prices. The rural artisan and the 
menial obtain a customary share of the crop from the 
threshing floor and there appear to be no signs of the 
cusom giving way (not at any rate in the Punjab) in the 
conditions created by the war. Moreover, it is to this 
group that the war has opened up several opportunities of 
employment alternative or additional in the army or out- 
side. Had it riot been for these opportunities, he would 
have fared perhaps only a little better than the landless 
labourer but not very much better than before the war. The 
village money lender has suffered both on account of the 
agrarian legislation and the war and has been drifting to 
the cities. 1 The village trader (where he was not a money- 
lender) has suffered a small loss through scarcity of supplies 
of goods he used to sell and a smaller turnover of foodgrains 
due to hoarding or direct sales to the buyer but he has 
largely or wholly made it up either through higher prices or 
through a larger quantity of foodgrains handled (because 
of larger production). On the whole he is a little worse off. 

* The situation is somewhat analogous to that in the United States 
in the later years ol the American Revolution when creditors were 
found 'running away from their debtors, and the debtors pursuing them 
in triumph and paying them without mercy*. 


It would, thus, appear that the larger landowner and to 
a smaller extent the middle landowner have definitely 
gained and the village money-lender definitly lost. The 
other groups have gained slightly in some directions and 
lost in other- 

From the long range point of view, inflation is an ill 
wind that blow)8 no agriculturist any good- Some rise in 
prices was bound to benefit him and was in fact very much 
his due after a protracted depression but a large continuous 
inflationary rise heightened the certainty of an eventual, 
sudden and steep downward reversal. Altogether, there- 
fore, the agriculturists at large should have had very little 
cause to hail inflation with any genuine satisfaction. 

Progress of thought about Inflation. Timely and effective 

measures to deal with the various consequences of the 
method of war finance adopted in India might have been 
undertaken if there had been clearer understanding of the 
character and gravity of what was happening. In place of 
them there was a series of ill-conceived, irresolute and 
sporadic measures emanating from the varied conflicting 
views and opinions jostling one and another for mastery in 
the general melee. 

Even as late as July 1942, the Central Board of Directors 
of the Reserve Bank said in their *Annual Report presented 
to the shareholders that "although most of the recognised 
elements of inflation are present, there is no evidence that 
inflation is present in the country in any serious form." 
There was furthermore, a reluctance to recognise that the 
sequence of cause and effect ran from currency expansion 
to rise in prices. 1 But the magnitude and rate of fresh 
additions to currency were growing so heavy and the rise in 
prices so mercurial that it became difficult to deny that a 
condition of fairly serious inflation was developing in the 
country. In January 1943, Professor C. N. Vakil crystalliz- 
ed the floating mass of views and partial analyses of the 
seriousness of inflation in India into a compact and clear 
analyses in his The Falhng Rupee. Denials that there was 
inflation in the country did, however, continue to be made 
supported with plausible arguments by even some of the 
1 Speech of th* Governor of the Reserve Bank, August 1912, 


best informed persons. The Finance Member of the 
Government of*India in the course of his speech introducing 
the Budget in March, 1943 made a number of important 
observations on the inflation problem in India. 1 The 
most important among these were (1) currency expansion 
was due to larger cash payments arising from the intensi- 
fication of Government's war activities and also the incres- 
ed demand for cash from the public; (2) there was no 
credit inflation in India but only a *' temporary situation in 
which an increase in the volume of purchasing power 
impinges for a time on a stationary or diminishing volume 
of consumable goods'* ; and (3) if war results in victory for 
the United Nations and, therefore, the British and Indian 
Government can pursue sound financial policies, " there 
is not the remotest risk of inflation of the nature and on 
scale which occurred in some of the countries which suffer- 
ed utter defeat in the last war". A few weeks later Mr- 
G. D. Birla, a prominent businessman and industrialist 
circulated a pamphlet entitled Inflation or Scarcity ?* 

wherein he categorically denied that existence of inflation 
in India and attributed the rise in prices to the scarcity of 
commodities." On the 12th April. W43, twenty Indian 
economists issued a Manifesto which stated that the 
inflationary spiral was already at work in India and that the 
inflation was 'deficit-induced fiat money inflation' caused 
by the peculiar system of war-finance under which British 
and Allied purchases made in India were paid for in sterling 
assets against which currency was expanded in, India. The 
Manifesto affirmed the existence of a casual relation 
between expansion of currency and rise in prices and 
recommended a comprehensive series of measure for 
1 Budget Speech, 1943-44, paras 50 -55. 

* Apropos of Birla's views, the following remarks of Cannan 
relating to the last war are of interest ; "During the war and after- 
wards, when a currency began to depreciate, it was often said that 
the cause of the rise of prices was a growing scarcity of commodities. 
This was supposed to be an argument in favour of increasing the 
currency, though it is difficult to see how any sane person could 
believe that the fact that commodities had declined in quantity was 
a reason for making that decline gi eater in proportion to currency 
by increasing the quantity of currency", (Money, P. 104). 


checking inflation and bringing prices under control. 1 In 
May 1943, the Government of India in a ref ipiscent frame 
of mind appointed a Special Officer to report what 
deflationary measures were necessary to counteract the 
effects of the expansion of currency, Thereafter the 
disinclination to recognise the existence of growing infla- 
tionary tendency steadily weakened and along with it the 
determination to combat its menace grew keener. The 
Central Board of Directors of the Reserve Bank in their. 
Annual Report presented in August 1943 significantly 
observed that "during 1942-43 inflationary tendencies 
steadily gathered strength encouraging and being in turn 
encouraged by scarcities of essential commodities including 
foodstuffs and cloth Psychological factors super- 
added to the basic monetary and economic facts operated 
towards creating a highly unsatisfactory and stable situation, 
although it is not possible with any degree of accuracy td 
assess the relative singificance of the former. Nor is it 
possible to measure the relative contribution of rising 
money incomes and the growing scarcity of goods to the rise 
in prices-* 1 * The first explicit recognition from the official 
standpoint of the presence and basic cause of inflation was 
contained in the Finance Member's Budget Speech 
delivered in March 1944. It was admitted that rather more 
than half of the war expenditure in the country was 
incurred by His Majesty's Government and other allied 
governments and that while the expenditure debitable to 
the Indian Budget had been fully met by taxation and 
borrowing throughout the period of the war, the 
Government had not at all times been able to raise 
sufficient rupees from the market to finance its total outlay. 
The rupees issued to fill the gap had led to an increase in 
the free purchasing power and though they had been backed 
by sterling assets had produced inflationary effects. 

1 Manifesto reproduced in Appendix B. 

2 In November 1943 appeared a pamphlet entitled war-time "Prices 
by Dr. P. J. Thomas containing a powerful plea for saving and lending 
to the, Government, Among the arguments used were : (I) that' the 
rupee is on the high road to appreciation, will fetch more after the 
war, (2) if people don't save, they themselves will be hit the hardest and 
(3) saved purchasing power will be available to sustain post-war 
industrial expansion. 


Measures to Combat Inflation. From this brief review of 
the financial operations of the Government and their conse- 
quences, their inevitably emerges the question if there was 
a more suitable alternative method in the past of conducting 
operations of public finance. It is also necessary to enquire 
Low far the measures that had been taken, particularly 
since the middle of 1943, were inflationary in character 
and effect. The more general form in which these 
questions may be asked is : how could inflation be checked 
at the root or in its effects ? 

At the very outset it is necessary to mention that the 
noninclusion of disbursements made on behalf of the Allied 
Governments in Government of India's budget created a 
wrong perspective for viewing the whole financial situation 
Even fresh taxation and borrowing may appear unneces- 
sary when it is found that the Government's own budget is 
easily balanced. It might be suggested, therefore, that if 
the incorporation into the annual budget of figures relating 
to the disbursements in India on behalf of the Allied 
Governments was not possible, the Government should 
have prepared and presented at the time of the budget a 
separate set of accounts showing the total disbursements 
and the total amounts raised by the Government of India 
and the inflationary gap. 1 

There could indeed be no single sovereign remedy for 
the evil of inflation ; a number of measures had to be 
combined to overcome its menace. The measures that 
could possibly be taken fall under the following heads : 

(i) Reduction in the volume of the Government's total 
disbursements (including those undertaken on behalf of 
other countries) to a point where the whole of them could 
be covered by non-inflationary methods of finance. 

(n) Covering in full, without reducing, the Govern- 
ment's total disbursements (including those on behalf of 
other countries) by the non-inflationary methods of taxes 
compulsory and voluntary loans liquidation of foreign 
private investments in India, etc- 

* It may be worth while attempting in however imperfect form 
something on the lines of Analysis cf the sou-tees of war Fin<mcc and 
Estimates of the National Income and Expenditure presented to British 
Parliament by the Financial Secretary to the Treasury. 


(in) Refusal on the part of the Government of India to 
furnish rupee finance to other Allied countries, i.e., throw- 
ing on these countries the responsibility of raising 
the required finance themselves in the Indian market. 

(tv) Adding to the reservoir of real resources by 
expanding production, stimulating imports, sealing down 

exports, importing and selling gold and forcing out hoarded 

(v) Preventing the incomes from getting inflated by 
the Government's disbursements or from exercising pressure 
on the limited quantities of real resources, by instituting 
various controls such as control of investment, wages and 
profits, price control, rationing, control of speculation, etc. 

Measures falling under the first head necessarily in- 
volved a contraction of India's war effort arid could not 
appeal to those who would have India make an all out 
effort in a large scale offensive against Japan. Though the 

victory in Europe might bring relief elsewhere, it was 
argued that it could mean no relaxation of effort in India so 
long as Japan remained unbeaten. The view taken by 
those who suggested such measures was that in the existing 
economic and political set-up of the country, India's capa- 
city to bear the burdens of war had already been overstrain- 
ed. The task assigned to India was so heavy that already 
she had to resort to concealed and indiscriminate taxation 
by inflationary methods in order to accomplish it. So long 
as India's capacity to make her voluntary contribution to 
war was not considerably expanded by altering the whole 
political and economic set up there could be no escape for 
the Government from inflationary methods of finance. 
From this it followed that in the prevailing circumstances 
inflation could be checked at the root only by reducing the 
total amount of Government disbursements. This was not 
so impracticable as it might appear provided the Allied 
countries could come forward to shoulder all further bur- 
dens of the war. Several issues, some of them political and 
military in character, arose from such a suggestion but 
it should be sufficient here to draw attention to the fact 
that before the war Indian economy rested on precarious 


mnrgins and nothing very much by way of development 
was done during the w IT to justify any great hopes of India's 
capacity to furnish the resources for war without pushing 
large sections ot population below the bare subsistence line. 
Measures comirg under the second head did not at all 
concern themselves with India's capacity to bear the burden 
of war but sought to substitute for the inequitably distributed 
burden imposed by inflation, a more equitably distiibuted, 
and therefore, more bearable (though not less onerous) 
burden imposed by steeply-graded taxes, compulsory and 
voluntary saving, etc. On principle there was ^nothing to be 
said against them; they are an efficacious antidote to infla- 
tion r Only under the prevailing circumstances they could 
not always fulfil the expectations entertained of them. 
Attention in this context might be drawn to fact that the 
large amount of purchasing power created during the war 
was not spread evenly over the whole mass of population 
but lay in a heavy deposit in some crevices and corners ot 
the economy and in a thin veneer in others. While, 
therefore, heavy pressure would have to be directed to 
some points, some withdrawal of pressure was desirable 
at others. The war contractors, bigger landlords and 
holders of highly-paid war jobs at the one end and the 

newly employed, particularly the better paid, workers at 
the other could well be made to pay more either through 

heavier taxation or compulsory savings. Saving schemes 
should have been given a very prominent place in the 
borrowing programme which should indeed have been 
shaped in such a way as to tap every little reservoir of 
genuine savings-* 

1 It may, however, be pointed out that there is, even when non- 
inflationary methods of war finance are being used, a time lag between 
Government disbursements and the inflow of income into govern- 
ment exchequer . This lag might well create an inflationary gap but 
this would not be so wide as to be serious. 

* The *save and lend' campaigns launched in some of the province* 
like Madras and U P, succeeded beyond expectations and illustrated the 
possibilities of n well-planned savings drive. That such a drive should 
be above all suspicion of undue or indiscriminate coercion need hardly be 


It was also suggested by some persons that the Govern- 
ment should raise the rate of interest offered on loans in 
order to make them more attractive. But raising the rate 
of interest was open to two serious objections : first, it 
would have adversely affected the value of gilt-edged 
securities with its inevitable reaction cm banks and insur- 
ance companies and s^cond, it would have marked a reversal 
of the cheap money policy hitherto maintained and left for 
post-war period a structure of high interest rates/ A good 
method of raising a few hundred crores of rupes finance 
would have been to enforce a scheme for the liquidation of 
all the private foreign investments. The process of liquid- 
ation would have required the preparation of an inventory 
of different kinds of investments and the calculation of 
their value. To some extent, the liquidation of these 
investments had been occurring spontaneously through 

stressed. After 1943-44 a 'small savings, campaign on an intensified 
scale was organised by the Central Government. A National Savings 
Commissioner was appointed to direct and control the small savings 
movement from the centre. A scheme -^as also evolved to provide for 
the employment of author sed agents on a commission basis whose tunc- 
tion was to be to collect money for investment from villages, purchase 
certificates on their behalf and deliver them to the villages In this 
connection it is necessary to point; out that to make intensive drives for 
Saving without at the same time taking direct measures to push down 
prices and ration consumption may for sometime resemble nibbling at 
the consumer's cake from two ends, though it is recognised that increas- 
ed saving (if it is genuine) is and inflationary. 

1 Besides such a rise "will be a directly inflationary step which 
would inflate the whole structure of interest rates raise the costs of 
industrial production and therefore industrial puces and increase the 
size of budget deficiate . (Cf B. K. Madan ; This Inflatim Problem 
Commerce ; January, 1944). There are ways of making the borrowing 
programme of the Government attractive even without raising the rate 
of interest. A change in the whole psychological atmosphere in the 
country would be about the most efficacious way. But short of it, 
tfcere are a few devices like the Price Bond issue whice may help to draw 
off the puichasing power The issue which was announced in December, 
1943, is a limit d one, consisting of several seiies of one lakh pieces each 
of Rs. 10 and Rs. 100 interest-free bearer bonas repayable in 1949. Twice 
a year a lot is drawn for each series of bonds for a warding prizes. The 
issue introduces the principle of state lottery and is open to the objection 
that it panders to the less noble the speculative and the gambling 
instincts of men. 


change of bands under the scare of war conditions. The 
process needed, however, to be hastened and intensified by 
judicious administrative pressure. 

Measures falling under the third head were strongly 
urged in this country by some prominent economists. 1 The 
suggestion was made that the responsibility for finding 
rupee finance for purchases made in India should have been 
made to rest on British Government who should, therefore, 
have been asked to raise loans in India. In soire respects 
such loans would have been better than the accumulation 
of sterling balances ; firstly, in that they would have been 
repayable in rupees and therefore, free from the risks 
attendant upon depreciation of sterling ; secondly, the 
Allies would have known at first hand the limits to which 
India could pay for the war ; and thirdly, the creditor-debtor 
relationship of India in relation to the Allied countries, 
particularly Great Britain, would have been clearly revealed. 
But it is obvious that they could be successfuly floated only 
if the atmosphere in India was favourable to their reception. 
It may also be noted that if the securities of the British 
Government against which people would have lent were 
later used to secure credits from the banks, they might 
have become the basis of credit inflation and thus defeated 
their own object From the standpoint of the yield of these 
loans also the suggestion was not very helpful considering 
that the yield of even the Government of India loans hias not 
been on the whole very encouraging (although since 1943-44 
the borrowing operations of the Government of India have 
been on an ampler scale and have met with greater success). 
It might perhaps have been more straightforward to tell 
these countries not to depend on India for resources to the 
extent to which they had done in the past. Reference may 
be made in this context to another suggestion sometimes 
put forward that it was the rupee-sterling link which had 
enabled the Allied countries to obtain rupee finance by the 
facile process of unlimited note issue and that the non- 
existence of this link at the outbreak of war or its rupture 
later would have automatically shifted the responsibility fpr 

1 Cf C N. Vakil The Falling Rupee. 1934 and Financial Burden of 
the War on India, 1943. 


finding rupee finance on to the shoulders of the Allied 
nations. Coupled with this suggestion was another that a 
ceiling shoulcl be placed on the accumulation of sterling in 
the assets of the Reserve Bank of India. How the rupee 
was linked to sterling in 1931 has been explained in an 
earlier chapter of this book. 1 The manner in which it was 
done makes it clear beyond doubt that the rupee-sterling 
link is merely a symbol of economic and financial relations 
between India and England. It was as futile to tilt against 
the symbol as it would be to think that if the rupee-sterling 
had not been there at the outbreak of war it could not have 
been established. As for the ceiling on sterling balances, 
it would have been a circuitous approach to the same 
problem ; for its obvious implication was that beyond a 
chosen point, the existing method of obtainin finance 
should have been suspended and replaced by some more 
satisfactory and acceptable method. 

Measures placed under the fourth head had a distinctive 
character in that they sought to combat ^inflation from the 
side of commodity supply rather than currency issue. In 
respect of these, the record of achievement remained rather 
disappointing. With a more or less static, if not in several 
cases actually diminishing, production of food articles and 
industrial commodities and with the expanding require- 
ments of the war, the sector of civil consumption had 
undergone severe contraction. A strong, well-organised 
foo/1 production drive along the lines recommended by the 
Foodgrains Policy Committee and the giant of every 
possible facility to the Indin industry to import machinery, 
tools and technical advice could moderate the intensity of 
burdens imposed by inflation. These measures should have 
been supplemented by a suitable trade policy, the anti- 
inflationary potentialities of which had not in the past 
received the attention they merited. By scaling down 
exports and stimulating imports, the reservoir of real 
tangible goods and services available within the country 
could be expanded. Early in 1945, a Government of India 
Supply Mission under the headship of Sir Akbar Hydari 
visited United Kingdom to arrange for the import of 
several essential articles of consumption and with the 

Seep. 73. 


removal of shipping difficulties, larger supplies of goods of 
certain varieties were being imported. Among the imports, 
both capital goods and consumers, goods were required but 
care had to be taken thatfcnports of only those consumers' 
goods were stimulated which would supplement and not 
supplant home production. Import and sale of gold had been 
recommended both to withdraw currency from circulation 
and to coax the hoarders, particularly those in rural areas, 
to part with their stocks. 1 From the 16th August 1943 the 
Reserve Bank of India started selling in an intermittent 
manner gold received from an undisclosed source. Silver 
procured under lease-lend arrangements from U- S. A. was 
also sold from August 1944. The veil of secrecy which has 

been deliberately thrown over the amounts of gold and 
silver sold, the profits made on the sales and the basis of dis- 
tribution of profits have been the subject of considerable 
critical comment. 1 Hoarding was an evil that could be 
dealt with directly by a rigorous control of prices, by, 
tightening the machinery for procurement, by controlling 
the movement of stocks and by introducing rationing of 
essential articles of consumption. The measures taken to 
force out hoarded stocks represented a move in the right 
direction. It is, however, necessary to point out that the 
effects of .such measures would wear out soon unless steps 
were taken to bring about an all round increase in produc- 
tion. There is after all a difference between normal trade 
stocks and hoards and moreover ,no country can live long on 
its hoards which are a fund and not a flow. 

Measures falling under the fifth head may to some ex- 
tent check currency expansion at the source but mainly 
they are to be valued for their effect in forcing excess 

1 The suggestion for the import and sale in India of 30 million ounces 
(69 million tolas) of gold was made by Sir Chunilal B. Mehta (Cf. his 
letters to the Times of India, Bombay, dated 17th May and 3rd September 
X943). In the second letter he suggested acquisition of gold from U.S. A. 
under Lease-Lend arrangements. 

1 Sir J. Raisman in reply to a question in the Legislative Assembly on 
February 8, 1944 said that gold was provided by the British and American 
Governments from their own resources and the proceeds were utlttized to 
meet the war expenditure of these Governments But he was not prepar- 
ed to disclose the amount of sales or the profits made. Unofficial esti- 
mates place the estimated value of gold and silver sales upto the end of 
1945 at Rs. 148 crores and Rs. 14 crores respectively , 


purchasing power to lie idle or flow into Government loans. 
The various economic controls price control, wage control, 
profit control, control of investment, control of speculation, 
control of private consumption through rationing are 
designed mainly to prevent purchasing power from exerting 
its fullest pressure on the limited or dwindling quantity of 
consumers' goods. The application of checks to the rise in 
prices, ior instance, prevents the expansion of currency 
from going as far as it would otherwise go. With keen 
discernment, a writer remarks, *' we agree that given an 
inflationary fiscal policy, any procedure which keeps down 
the cost to the government of goods and services will 
correspondingly reduce the amount of monetary expansion 
which such a policy requires. This is the element of truth in 
the doctrine that it is possible to check inflation by direct 
price control. The better the bargains that the government 
is able to drive, the less the pressure on the Treasury for 
the creation of more and more new money." 1 Price control 
in India had been all along unco-ordinated, ill-conceived 
and irresolute and needed to be screwed up as a part of an 
anti-inflationary drive. Wage control which is an essential 
adjunct of price control was not attempted in India at all 
except that under the Ordinance of the 17th May, 1943, the 
funds set apart out of profits by way of bonuses and 
commissions could be regulated for income-tax purposes. 
Dearness allowances were given by both government and 
private employers and, in so far as they were paid out of 
funds which would otherwise have remained idle or been 
invested in Government loans, must have had an 
inflationary effect.* Yet it would be as rash to question their 
desirability as it would be to exaggerate in comparison with 
other factors at work, their price inflating activity. On the 
other hand, the employment of many 'experts* by the 
governments at very high salaries, the creation of a number 
of war jobs and the laxity sometimes displayed in the 
matter of expenditure deserved more critical notice than 

1 Hardy ; Wartime Control of Prices. 1940, pp. 43-44. 

1 Refer for further discussion of this question to Appendix C. 


had been given them. Direct limitation of dividends and 
profits had not been enforced and the only advance made 
in this direction was the taxation of excess profits made 
during the war. Later on, however, the Central and 
Provincial governments followed the line of invigorating anc 1 
intensifying the economic controls, particularly those or 
investment, speculation and consumption. The Defence o 
India Rule of the 17th May, 1943, prohibited, except witt 
the consent of the Government, new capital issues of ever] 
kind. By a series of Orders and Notifications issued since 
March 1943 by the Government, forward trading in grains 
oilseeds, sugar, cotton and bullion was prohibited- Th< 
declaration and disposal of all stocks of yarn and cloth b? 
specified date was ordered under the Cotton Yarn anc 
Cloth Control Order of June, 1943 and ceilings were im 
posed on the prices of a large number of varieties of cloth 
Rationing of food articles was introduced in a large numbe 
of countries all over India. In October 1943 an Ordinance 
for the prevention of hoarding and profiteering was passed 
and notifications for limiting profits of dealers in a large 
number of commodities to 20 per cent above the landed cost 
or cost of production were issued under it. Although taken 
together, these controls, especially the later ones, brought 
about a modest alleviation of the situation, they could not 
be considered more than commendable palliatives for a 
malady that called for drastic remedies. 

Economic controls of the kind mentioned above must form 
an essential part of any plan to combat inflation They are, 
however, like the elements of jigsaw puzzle which must be 
fitted together into a composite plan to produce the desired 
effect- There may be something to learn in this respect from 
the American experience which President Roosevelt con- 
veyed to the Congress on the 7th September, 1942m these 
words: "Our experience has proved that a general control of 
prices is possible only if the control is all inclusive. Our 
entire effort to hold the cost jpf living at the present level 
is now being sapped and undermined by further increases in 


farm prices and wages and by the ever -increasing pressure 
of prices resulting from the rising purchasing power 

It is impossible for the cost of living to be stabilised 

while farm prices continue to rise. It is impossible to keep 

any prices stable if wage rates continue to rise What is 

needed is overall stabilisation in prices, salaries, wages and 
profits." Such a comprehensive scheme of economic control 
depends for its successful enforcement and operation on the 
presence of organised systems of production and distribution 
and on the widest public approval and co-operation. With- 
out stich co-operation, the wartime economic system is like 
clay with lots of stones in it, refractory in parts and an 
intractable material on the whole. With such co-operation 
it becomes pliant and malleable and spontaneously 
responsive to Control and regulation. 1 
Price movements and price control 

The close interrelation df currency and prices and the 
role of price control as anti-inflationary factor have been 
touched upon in the foregoing paragraphs- In view of the 
importance of the topic, some further treatment of it at 
this stage appears to be necessary. 

Perhaps the most striking and in some ways the most far- 
reaching among the changes brought about by the war was 
the rise in prices. Prices did not indeed rise continuously 
or steadily ; sharp advance in one period was followed by 
strong reverse in another, only to be followed again by a 
powerful and disconcerting upward thrust. An examination 
of the price index numbers by which changes in general 
price level are usually measured for every one of the first 
67 months of war will hardly yield any significant results ,* it 
is, therefore, proposed to split up the whole of this period 
into shorter periods in order to bring out the broad move- 
ments of prices. Seven periods clearly stand out and 
* Cf. A brief discussion of the conditions necessary for the 
successful operation of economic controls will be found in my article 
on 'Limits of Economic Control' tiThe Eastern Economists. November 
19, 1943.) 



following table shows the magnitude and direction of price 
changes in each : 

Index numbers in the first 




and last month of the 

during the 


period in 





(4 months) 



(August 1939=100) 114-137 

+ 23 

1939 ' 

Economic Adviser's 

(Week ended 19th 

August=100) ... 108-138 

+ 30 



Calcutta ... 130-114 


(7 months) 


July 1940 

Economic Adviser's 137-111 

- 26 



Calcutta ... 135-130 

+ 15 

(10 months) 


May 1941 

Economic Adviser's 110-119 

+ 9 


June 1941 

Calcutta 137-157 

+ 20 

i OA 

(13 months) 

April 1942 

Economic Adviser's 126-146 

T *' U 


May 1942- 

Calcutta 169-345 

+ 376 

(16 months) 

August 1943 

Economic Adviser's 148-238 

+ 90 



Calcutta 349-297 

- 52 

(9 months) 

1943 - 

Economic Adviser's 241-236 

- 5 

April 1943 


May 1944 

Calcutta 292-306 

+ 14 

(10 months) 

March 1945 

Economic Adviser's 239-249 

+ 10 

The initial spurt in prices which lasted well into the 
middle of January 1940 was largely speculative in character, 
being based on anticipations of intensified demand and 
reduced supplies. Partly it was due to real factors such as 
higheF freight and insurance charges, depreciation of sterling 
(and therefore of the rupee) in relation to dollar, rise in 
the replacement cost of goods and expansion of currency. 

The inevitable break from the high levels reached was 
initiated by the announcement of excess profits tax in the 
third week of January and assisted by the more determined 
regulation of prices by the Government. The low tempo 
of the war upto April 1940 had as its concomitant low prices 
which dipped lower still after the fall of France and the 
consequent loss of important markets on the Continent. 


In August 1940, recovery in prices started at a slow and 
sure pace and grew quicker and more definite during the 
next twenty-one months- Behind it was the influence of a 
combination of factors, the major ones among them being 
the large purchases of the British Government, the grow- 
ing physical shortage of some goods, increasing shipping 
difficulties, hoarding and profiteering, rising money incomes 
and the rise in cloth prices resulting from the hostilities 
with Japan. 

After May 1942, prices registered an enormous rise 
which originating largely from the heavy expansion of 
currency was aggravated by the wild orgy of speculation in 
the commodity markets. Difficulties of internal transport 
and reduced imports contributed to th increasing com- 
plexity and gravity of the price situation. Some abatement 
in the speed of currency expansion as well as rise in prices 
was noticed when the Government brought into operation 
after May 1943 a series of new controls on the production, 
sale, and movement of goods. 

After September 1943 and right upto April 1944, prices 
recorded a more or less continuous decline. During this 
period, economic controls were tightened all round and a 
serious effort was made to remove the loopholes and laxities 

in the system of price control. 

After May 1944, the prices became more or less steady, 
with a slight upward tendency for most of the time- The 
intensification of anti-inflationary measures such as borrow- 
ing and the continuous drive for better procurement and 
distribution of foodgrains and better distribution of cloth 
contributed towards the improvement in price situation. 

Movements of prices during this recent war furnish a 
striking and instructive contrast with those during the last 
war. (See table below). Price rise was on a smaller scale 
and was spread more evenly during the last war. A close 
parallel movement of prices during the two wars was, how 
ever, hardly to be expected in view of the differences in the 
character of the two wars, in the sequence and intensity 
of their varied phases and in the impact made by them on 
Indian economy. 



Prices during the two wars 

(Calcutta Index Number of prices) 
July 1914= Aug. 1939-100 

1st war year 

2nd war year 

3rd war year 

4th war yea 

5th war yeai 


















































, IV 










30 f 























































128 137 




























The various components of the general price level 

have not shown any uniformity of movement. Some items 

have shown larger rise than others. In view of the present 

acute food situation in the country, the 'course of food 

prices is of special interest. In the table below, hides 

numbers of food prices have been set against the general 

index numben, The course of prices of non-food articles 

:an be roughly deduced from the disparate movements of the 

wo sets of index numbers-Food prices, it will be noticed, 

ose much less than non-food prices up to the end of 1942 

out in subsequent months right up to September 1943 

completely outpaced them. 



Food Prices 

(Quotations for the last week of each month) 




(July 1914=100) 

July 1913 = 100 

Week ended 
19th August 
= 100) 











( More General 





than 15 




Sept. 1939 
Dec. 1939 
July 1940 









June 1941 
May 1942 
Dec. 1942 








March 1943 
Sept. 1943 
Jan. 1944 










April 1944 
May 1944 







March 1945 






Another notable wartime development affecting prices 
was the disruption of those processes by which the prices 
of the various commodities in different provinces and parts 
of the country were brought to a more or less uniform level 
after allowing for cost of transport and small variations due 
to certain local factors affecting demand and supply* Pro- 
hibitions of or restrictions on the movements of goods 
imposed by the Provinces and States along with difficulties 
of transport led to wide divergences in the magnitude as 
well as the speed of the rise in the prices of the same 
commodity in different Provinces and States. Free mobility 
of goods which integrates and unifies the market in f normal 
times having been greatly hampered, the Indian market 
presented the appearance of a loose and disjointed series of 
narrower markets. The resulting price differentials often 
encouraged hoarding, corruption and profiteering. 


During the larger part of the years 1942 and 1943, many 
sections of the population found themselves exposed to the 
increasingly heavy pressure of growing scarcity and want. 
Scarcity manifested itself as a double-barelled problem of 
physical shortage and high prices and involved the most pain- 
ful reductions in the daily consumption of persons with small 
and fixed means. In this atmosphere of unabating hardship, 
criticism of the policy and measures adopted by the Govern- 
ment naturally turned more and more bitter and destructive. 
What had the Government been doing, it was asked, to 
impede the sharp advance of prices and why did they rail ? 

It is hardly necessary to go into all the measures taken 
by the Government to control prices of various commodities, 
Nor is it necessary to refer except in passing to the 
machinery set up for price control. The main feature of this 
machinery was that the Government of India acted as the 
co-ordinating authority controlling prices at the producer's 
and wholesale stage while the Provincial Governments 
controlled them at the retail stage. The Central Govern- 
ment called from time to time Price Control Conferences 
to examine the situation and assist in the formulation of 
schemes and measures of price (jontrol- These Conferences 
and six of them were held in October 1939, January 1940, 
October 1941, February 1942, April 1942 and September 
1942 were attended by the representatives of three chief 
units of administration, namely, the Central Government, the 
Provincial Governments and the Indian States. The Provin- 
cial Governments and some of the States carried out the 
measures of control through the agency of Controllers of 
Prices, functioning at the headquarters and the executive 

officers in the districts and local areas. Price Advisory Com- 
mittees were set up in several provinces and States to 
assist both Price Controllers and local officials. In addition 
to Price Control Conferences, five Food Conferences were 
alo held after October 1942 to tackle the problems of the 
production and prices of food. In December 1942, a 


separate Food Department was set up at the Centre under 
the charge of the Commerce Member ; in August 1943, one 
of the members of the Viceroy's Executive Council was 
appointed Food Member and the Department passed under 
his charge. Mop-official and expert opinion was made 
available to the Department through the Food Advisory 
Council and its special committees. In July 1943, the 
Government appointed the Foodgrains Policy Committee to 
examirife the past policy and the existing position in India in 
relation to the supply, distribution and prices of foodgrains, 
and to make recommendations. The report of the Com* 
mittee was published in November 1943 and the recommen- 
dation and conclusions embodied in it were been made the 
basis of the subsequent food policy of the Government. 

A bare summary of the measures taken during the war 
to control prices should suffice to delineate the evolution of 
price control in this country. As soon as prices began to 
soar after the outbreak of the war, powers taken by the 
Government of India under the Defence of India Rules 
to control prices belonging to the category of necessaries 
were delegated by them to the Provincial Governments 
by Notification No. 20 of 8th September 1939. The motive 
behind this first application of price control was the protec- 
tion of the consumer against profiteering. Towards the end 
of September 1939, the replacement cost of goods, i.e. the 
cost at which the producer or importer could produce or 
replace his stock of goods along with a minimum margin of 
10 per cent above pre-war prices was made the standard with 
reference to which the maximum prices were to be fixed- 
Later in May 1940, the requirement as to a minimum margin 
of 10 per cent, compared with pre-war prices was abandoned, 
for it was felt that the pre-war prices did not furnish any 
longer a proper standard for companion and that prices 
^should be fi^ed with teference to costs after determining the 
latter by a careful scrutiny. Most provinces, therefore, Jbe- 
gan to publish fair price lists of wholesale ^nd retail prices 
fot the information of the public. Hoarding, refusing to sell 
a3 profiteering were all made punishable under the 
of India Rules. 


On the whole it would be correct to say that until July 
1941, the problem of price control did not assume any acute 
shape. This was largely because the general level of prices, 
after an initial rise, began to decline and though there 
was again a steady rise from June 1940 or June 194i, it was 
so gradual that it was easily acquiesced in as the Inevitable 
resultant of a number of wartime factors such as increased 
war demand for certain commodities, restricted supply in 
certain cases, increased cost of imported materials, transport 
difficulties* etc. Moreover, some rise in prices was even 
welcomed as an overdue measure of relief to the agricul- 
turist. After July 1941, however, prices of various 
commodities including essential foodstuffs and textiles 
began to rise sharply. In December 1941, the maximum 
price for wheat was fixed at Rs. 4/6 (Lyallpur and Hapur) 
and was revised upwards to Rs. 5 in March 1942. The price 
of sugar was also brought under control in May 1942- A 
distressing development arising from the enforcement of 

these and other controls over prices was the transfer of the 
controlled commodities to the black markets, creating acute 
shortages in the ordinary markets. The control over wheat 
was lifted on the 25th January 1943 and immediately stocks 
of wheat flowed into the markets in response to the higher 
uncontrolled prices. But in spite of the alternation of 
control and decontrol and in spite ol the stern though 
sporadic action taken against hoarders, the scarcity of food 
steadily grew worse and prices soared until in August 1943 
scores of deaths by starvation occurred in the streets of 
Calcutta and revealed the gravity of the situation with 
painful vividness. The hard core of official complacence 
then began to melt and the next few months witnessed a 
deter mind drive to roll back the centrifugal forces by a 
series of Ordinances, directions and instructions issued by 
the Central Government. The first effective step in secur- 
ing control over the prices of cloth was taken by passing 
the Cotton Cloth and Yarn (Control) Order in June 1943 
and control was tightened further by. appointing a Textile 
Commissioner who was assisted by a Textile Control Board 
'Consisting of the representatives of textile industry, raw 
cotton, labour, cloth trade and the consumer- The Hoarding 


and Profiteering Prevention Ordinance was promulgated in 
October 1943 to herald the first comprehensive and serious 
effort to deal with the chronic evil of price ballooning by 
traders and profiteers. During 1944, statutory price control 
was instituted for wheat, gram, barley, bajra, jowar and 
maize. As regards rice, an all- India statutory price was not 
fixed but the Provincial Governments themselves imposed 
statutory maxima of rice prices. In July 1944 the Consumer 
Goods (Control of Distribution) Order was issued with the 
object of regulating supplies, distribution and prices of 
consumer goods including imported commodities. 

Though the measures taken towards the end of 1943 as 
also the growing confidence in the prospects of Allied 
victory eased in some measure the price situation, checking 
the rise of some prices and securing decline in others, yet 
on a complete and comprehensive review of the whole 
position since the outbreak of war, it would be correct to 

maintain that wartime price control was a dismal failure in 
India. It was week, vacillating and half-hearted .and its 
failure was inherent in its very character. Any enumera- 
tion of all the reasons for its failure would soon run into. a 
long list but the more important reasons could be brought 
under the following five heads : an imperfect understanding 
of the principle of price control ; tardiness in evolving an 
effective administrative machinery ; lack of proper co- 
ordination even in such machinery as was set up ; the limits 
to control set up by the distinctive organization of Indian 
economy and, finally, the uncongenial political, psychologi- 
cal and monetary set-up of Indian war economy. A brief 
study of these may suggest some useful lines of. thought and 
action for the future. 

It would be hardly necessary to enter upon the definition 
of price control here if the whole approach to the subject 
did not seem to depend largely on it- Price control, 
ordinarily understood as a body of measures to fix prfees 
backed by the coercive apparatus of the Government, must 
really be defined as the removal of the control of prices over 
the different sectors of a country's economy. Now it is widely 
recognised that prices, which are themselves the external' 


manifestation of numerous forces working within the 
economic system, exercise a profound control over a 
country's economy as allocators of productive resources 
among different uses and as regulators of production, 
consumption and distribution. But what is perhaps not so 
well appreciated is the fact that price control involves 
precisely the removal of this control by prices and its 
replacement by control of a different kind. In other words, 
the price controlling authority must neutralize or 'sterilize' 
the price mechanism by reaching down to those forces that 
form prices themselves and bringing them under control. 
Only after a fairly long record of failure was it realized in 
India that 'controls over supplies and distribution are 
essential and vital corollaries of price control/ The im- 
portance of control over the monetary factor also took 
some time to leap to the eye. On the other hand, suppres- 
sion of profiteering and hoarding and control of speculation 
were relied upon as the main props of price control from 
the very beginning. 

Nor was the rationale of price control always clearly 
present to all minds. While putting down of the middle- 
man profiteer was recognized as a legitimate and essential 
objective of price control, the agricultural inter^ts in some 
provinces looked askance at the fixation of agricultural 
prices as a kind of deprivation and the consumers faced 
with acute shortage of the commodities under control often 
failed to find any particular merit in price control. In all 
this confusion, the vital issue seemed to be overlooked that 
removal of price control means the restoration of the 
control of prices over economic activity and that, this 
removal was opposed to the whole logic of war economy ; 
for war economy by its very nature is an economy con- 
sciously planned and directed by the state to achieve a single 
unified objective, i.e , victory, and obviously a controlled 
economy and uncontrolled prices go ill together, 

This imperfect insight into the forces .at work was, of 
course, not a little due to the absence of any accumulated 
body of experience and knowledge handed down from the 
past. There was, therefore, bound to be a certain amount 


of feeling of the way and groping about. But the changes 
in price situation , after the outbreak of war were themselves 
of such a nature as to induce at first complacency and 
relaxation of effort and then to demand, with the crack of a 
whip, as it were, swift and resolute action. It is obvious 
that the , best period for framing plans and formulating 
procedure for price control was from January 1940 to 
October 1941, when the price situation was easier and 
inexorable events did not press for hasty and improvised 
solutions. It is interesting to observe that this was also 
the period falling between the second and third Price 
Control Conferences. As a matter of fact, every worsen- 
ing of the price situation in India was marked by the calling 
of a Price Control Conference and the history of price 
control may be said to be very largely the history of 
decisions taken by the Conferences and the subsequent 
action of the Central and Provincial Governments on them. 
There was no single comprehensive and co-ordinated plan 
drawn up and enforced with the co-operation of the public 
to meet a situation of grave difficulty both for the Govern- 
ment and the people- On the other hand, centrifugal forces 

were allowed to have their sway and more latitude than was 
warranted by the facts of prevailing situation was allowed 
to the Provinces, States and even districts in controlling 
prices and transfrontier movements of food grains. 1 
Furthermore, programmes for the acceleration of produc- 
tion and regulation of consumption were pondered over and 
laboured until the storm was on the country. Quick 
changes continued to be rung in the composition of the 
Viceroy's Executive Council and the responsibility for 
feeding the country passed from one member to another 
like a shifty shuttlecock, telling visibly on the firmness and 
continuity of policy. 

A successful pplicy of price control presupposes not 
only an effective machinery of price control but also a clear 

i To wards the last quarter of, 1943. however, there was a signifi- 
cant reversal of policy and the Central Government was by bold self- 
assertion able to make the Provincial Governments agree to a uniform 
policy in the matter of price control and rationing. 


conception of fair price and the establishment of suitable 
parities between different groups of prices. Furthermore, 
it requires the determination of the number and range of 
prices that will be brought under control. In any economy 
subject to the change and flux of the dynamic conditions of 
war, the determination of fair prices is bound to be a 
difficult task but in India it was not squarely faced. A 
systematic machinery for investigation into the farmer's 
costs or the parities between different sets of prices those, 
for example, of food articles and non-food articles ; of raw 
materials and manufactured goods ; of prices in one area and 
another area was conspicuous by its absence. The unfor- 
tunate consequence of it was that when the prices of articles 
not subject to control moved upwards, they tore asunder the 
ceilings or maxima imposed by the controlling authority on 
the prices of other articles. Perhaps nowhere was it more 
evident than in the case of control over prices of foodgrains 
like wheat without a corresponding control over price 8 
of minor foodgrains or those of goods consumed by the 
cultivator- The question whether rice control should be 
comprehensive (i.e., a blanket control) or selective was 
also not finally answered in this country. The logic of 
control leads, of course, to an ever widening extension of 
its scope from the price of one article to that of its 
substitutes and satellites, from the price of a manufactured 
commodity to that of the raw materials entering into its 
composition and from the prices of goods in general to the 
prices of the services of factors of production, t.e., wages, 
rent, interest and profits until it covers every price in the 
whole national pattern- But the administrative difficulties 
of such a control would have been formidable. Nor are 
all prices which make up the price system equally impor- 
tant. The/t are some prices which have a strategic value 
in the sense that they exercise a decisive pull on the whole 
price system, for example, prices of foodgrains, wages and 
rents, and these cannot be left out of the scope of any well- 
conceived price control scheme. Moreover, a comprehen- 
sive control of all prices in India had a greater chance of 
success if it had been applied at an early stage when prices 
bad not had a chance of raising one another by mutual 


stimulation. But at a late stage and particularly with an 
expanding currency circulation constantly blowing up the 
'blanket', it could not but transgress the bounds of an 
administrator's legitimate ambition. Related to this blanket 
versus selective price control issue but pertaining parti- 
cularly to foodgrains is the statutory versus ceiling price 
issue. In respect of the major foodgrains, the verdict of the 
majority of the Foodgrains Policy Committee went in 
favour of statutory price control. 1 The statutory price 
control, according to the Committee, "takes the form of 
enacting legislation prohibiting a seller from taking, or a 
buyer from offering more than a given amount, or of legis- 
lation prohibiting a buyer from offering or a seller from 
taking less than a certain amount-". The system of ceiling 
price, on the other hand, "*is a form of market manipulation, 
in which the Government abstains from purchasing when 
the price touches a certain figure in the hope that its pur- 
chases are such a large proportion of the total that the price 
will fall below the ceiling limit." Now both statutory and 
ceiling control require certain conditions to be fulfilled if 
they are to be effective. Neither of them can b*e made 
effective if the fundamental forces of supply and demand are 
not brought under control. Statutory control has the merit 
of fixing a definite price and thereby discouraging the 
tendency on the part of producer or seller to withhold 
stocks in the expectation of a future rise. Two 
objections could be raised against it : firstly, its failure in 
the case of wheat in the past prejudiced its case and, 
secondly, it could not be, made effective without an 
effective control over supply. These objections did 
not very much damage the case for statutory control 
because it was possible to steer clear of the mistakes 
made in the past by instituting an efficient machinery for 
the procurement of foodgfains, controlling simultaneously 
the prices'of a number of foodgrains as also those of non- 
food articles, controlling the movements of food grains, taking 
deterrent measures against the hoarders, setting up govern- 
ment reserves of foodgrains and finally by vesting in the 
Central Government the right to suggest levels at which 
prices should be fixed and the changes that should be made 

1 Report of the Foodgrains Policy Committee, 1943, p. 85. 


in them 1 . The ceiling system has no doubt the advantages 
of not being rigid and not bringing the law into contempt 
through its failure but one essential condition for its success 
is govermental possession of, or control over, a very large 
part of the total supply and this could not be easily satisfied 
in India. 

Given a proper comprehension of the principle of price 
control, an efficient administrative machinery and a suitable 
co-ordination of price parities, an effective system of price 
control was not impossible of achievement in India. But 
it was necessary to recognise some of the limitations and 
difficulties of the task in this country* Some of these were 
such as could not be easily overcome but others were amen- 
able to remedial treatment. The large size of the country, 
the small, individualistic and unorganised character of 
production and trade agencies and the very large number of 
small agricultural producers whose operation are not easy to 
bring under control set definite limits to the achievements of 
price control in India. The difficulties were more or less 
basic but there were others which arose largely during the 
war. Among these, the foremost was, of course, the large and 
continuous expansion of currency. Price control like other 
forms of econmic control is no doubt itself an anti- 
inflationary factor but without monetary control no control 
Qver prices can be sustained for long. It is well known that 
beyond a certain stage inflationary expansion of currency 

creates a vicious spiral of rising prices . which feed on 
themselves and against which price control provides no 

1 The Foodgrains Policy Committee recommended the appoint- 
ment of a small Staning Prices Committee, representative of the 
Centre, the Provinces and States, agriculturists and trade to review 
periodically the price situation and suggest changes in prices, the 
recommendation was given effect to by setting up a Price Advisory 

2 Dishoarding and dissaving by certain classes of persons during 
wartime ha* also been mentioned as a price~ r aiiing factor (C/. V.K R.V. 
Rao ; War and Indian Economy* P. 368). It is difficult to assess the 
magnitude or effect of this factor but it must be comparatively a very 
small factor in the total situation. * 


effective check. 8 Difficulties of transport wer$ anothei 
factor in the situation but their general effect was to create 
local shortages of some commodities in Some areas anc 
cause a rise in their prices. Again speculation complex 
with which the markets were periodically seized accelerated 
the upsurge of prices. And finally and above all, the 
political situation in the country was not helpful to the 
spread of that popular enthusiasm and the willingness tc 
view things from a largerst andpoint which makes measures 
of governmental controller of an unwanted imposition and 
more of an acceptable war time necessity. 


The outbreak of the present war did not cause anj 
immediate panic or loss of confidence in the paper currencs 
such as was witnessed in the early months of the last war 
The earliest reaction of the war on the Indian currency 
system was in fact a large and unprecedented absorptior 
of currency notes. 

After the first four months of war, however, a demanc 
for rupee coin for purpose of hoarding arose. It is likelj 
that there was some infiltration of rupee coin into private 
hoards occurring even during these four months; for the 
trend towards a large and almost continuous return o1 
rupee coin from circulation, which had gone on since 
3920-21, had been reversed as soon as the war broke out 
and a steady outflow of rupees had ensued. But it was 
towards the last week of May 1940 when the news oi 
French reverses were received that the craze for hoarding 
was accentuated and turned in subsequent months into i 
scramble. From the 15th June to the end of August 1940 
Rs. 21-93 crores of notes were returned to the Reservi 
Bank. Between 1st September 1939 and 21st June 1940 
the holding of rupee coin in the Issue Department o: 
Reserve Bank fell from Rs. 57.87 crores to Rs. 351 crores. 

8 In the Indian Economic Conference hfcld at Madras in Decembe 
1943, it was mentioned by Mr. S. K. Rudra, Secretary and Economi 
Advisor to U. P. Government, that in some mandis of U. P., th< 
prices of the same article varied according to the media oi paymen 
used, being higher for currency notes and lower for rupee or smal 


To deal with the situation thus arising, the Government 
of India made it an offence by a notification of the 25th 
June 1940 for any person to acquire rupee coin in excess of 
his personal or business requirements, This notification, 
while it succeeded in its objective of reducing the total 
demand for conversion of notes, intensified the demand for 
smaller coin. This necessitated the adoption of special 
measures. The issue of small coins was limited in both 
Bombay and Calcutta and in Bombay small change depots 
were opened to cope with the rush for small coin, 

The situation was greatly eased by the introduction of 
the Government of India one-rupee notes by an Ordinance 
issued on the 20th July 1940. The notes were to be current in 
the same manner and to the same extent and as fully as the 
silver rupee coin. To begin with, one-rupee notes which 
had been printed in 1935 to meet a possible contingency but 
had not been used were put into circulation. Later in the 
first week of July 1941, a new issue of the Government of 
India one-rupee notes printed in larger size and on better 
quality paper was made. In February 1943. bank notes of 
the denomination of Rs. 2 were also issued by the Reserve 
Bank of India. 

Besides the issue of one-rupee notes, other measures 
were also taken to deal with the situation, First of all, the 
fineness of the silver half -rupee was reduced from 11/12 to 
1/2 by an Ordinance issued on the 26th July 1940- By 
another Ordinance of 23rd December 1940, the fineness 
of the rupee coin was similarly reduced from ll/12th to 1/2. 

A second measure was the recall of old coins from 
circulation. By an Ordinance promulgated on the llth 
October 1940, all victoria rupee and half-rupees coins were 
required to be returned by 1st April 1941. It was decided 
later on to withdraw King Edward VII rupees and half- 
rupees from circulation and by a notification issued on the 
4th November 1941, these coins ceased to be legal tender 
after the 31st May 1942 (although they could be accepted 
until the 30th September 1942 at Government treasuries, 
post offices and railway station and thereafter, until further 
notice, only at the offices of the Reserve Bank). On 1st 
October 1942, another Notification was issued by the 
Government of India calling in with effect from 1st May 


1943 all George V and George VI rupee and half-rupees 
coins of li"12ths fineness. By two subsequent notifications 
of the 16th November 1942, Queen Victoria and King 
Edward VII standard rupees and half-rupees were declared 
to cease to be legal tender even at the offices of the 
Reserve Bank from the 1st May 1943 and George V and 
George VI standard rupees and half rupees were to cease 
to be legal tender at the offices of the Reserve Bank with 
effect from 1st November 1943. 1 Thus practically the 
whole of the silver rupee and half-rupee coin with the 
exception of the new quaternary silver coin has been 

A third measure which was directed to deal with the in- 
creased demand for smaH coin was the issue in January 1942 
of a new half-anna coin of square shape and rounded 
corners and made in nickel-brass alloy- Similar alteration in 

the metallic contents of one-anna and two-annas pieces was 
also made and the new one-anna and two anna pieces were 
issued from the Bombay Mint on the 7th March and 27th 
March respectively. In January 1943, when the disappear- 
ance of copper pice from circulation due to a rise in its in- 
trinsic value to the level of face value had begun to cause 
considerable discomfort, a new pice, less than half in 
Weight, having a smaller diameter and a circular a hole in 
the centre and of lower fineness was minted- The new 
pice was issued from 1st February 1943 but owing to the 
unusual non-monetary uses to which it was put, its issue 
did not prove very helpful in improving the situation. 

A perturbing development in the currency situation was 
the manifestation of an acute shortage of small coin in the 
months of October and Novembet 1942, which caused great 
inconvenience to the public in making small payments. 
Ever since the war broke out, the absorption of samll coin 
had gone on at a rapid rate but the rate became almost 
phenomenal in the first half of 1942-43 The total amount of 
small coin (excluding half-rupees) absorbed since the out- 
break of war upto the end of 1942-43 was Rs. 15.6 crpres of 

1 The total amount of silver coin including half -rupees, qurter- 
rupees and one-eight rupees withdrawn from circulation during 1939-46 
aggregated nearly 34 crores of rupees. 


whifh Rs. 3J crores were absorbed in the first of 1942-43 
and another Rs. 4j crores in the latter half, A communique 
of the Government of India issued on the 27th November 
1942 attributed the prevailing scarcity of small coin to 
hoarding, though it was recognised that a part of the 
increased demand for small coin had been due to the in- 
creased economic activity in the country, the acceleration of 
public works and the large disbursements to the military 
forces maintained in India. But even hoarding, as was 
pointed out, can be of two types, one prompted by fear and 
the other motivated by a desire to make profit. The main 
contributory factor according to the Government of India 
to the prevailing scarcity of coin was hoarding for profit, 
either with a view to selling small coin at a premium or, as 
in the case of pice, in anticipation of of a rise in the price 
of metal to a level which might make coin-melting profitable- 
This kind of speculative hoarding could be discouraged 
only by public vigilance and co-operation between the 
Government and the people to expose the activities of the 
profiteers. The remedy for the other and the less vicious 
type of hoarding, that is the one prompted by fear, was 
the restoration of public confidence in the small coin 
position as a whole and in the Government's capacity to 
meet all reasonable small coin requirements. The magni- 
tude of the Government's effort in this direction can be 
estimated from the fact that by December 1942, the 
Government mints were turning out small coin at the rate 
of 72 million pieces a month and in the month of August 
1944 touched the peak level of 219 million pieces as against 
a monthly average of 16 million only in Augubt 1939. The 
output was. however, declined since then and stood at 199 
million in March 1945. Since October 1943, the mint at 
Lahore has commented operations and has made a sustantial 
contribution to the expansion bf small coin output- 

The small coin position is now much better and though 
shortages of a local character have not completely dis- 
appeared, they a reeven in mofussil areas ..much less acute 
than one or two years earlier. While the Government^ en- 
deavoured to put down hoarding by making acquisition and 


possession of small coin in excess of personal or business 
requirements a penal offefice, the people tried to make their 
own adjustments to the new situation by using improvised 
substitutes such as postage stamps and coupons and by 
varying the size of their purchases. 


Another development, besides the heavy currency 
circulation, which not only effects vitally the present but 
holds far reaching possibilities for the future is the large 
accumulation of sterling balances as a credit item in India's 
balance of payments. A part of the accumulated sterling 
has already been utilized for effecting repatriation ol India's 
sterling debt and the disposal of the remainder is at the 
moment a subject of acute discussion and anxious specula- 
tion. These two aspects of the disposal of accumulated 
sterling the solved past and the unsolved future will 
have to be kept distinct for purposes of study. 

Sterling accumulated in very large amounts with the 
Reserve Bank of India largely as the result of a favour* 
able balance of trade and the war , purchases made by the 
British Government in the Indian market both of which 
were paid for in sterling in England. This led to the 
adoption of a large scale programme by the Government of 
India for the repatriation of India's sterling debt. It may 
not be supposed that repatriation (which simply means the 

substitution of rupee liabilities to residents for sterling 
"liabilities to non-residents) commenced only after the war, 
for it had in fact begun to be effected some two years 
before the war. The amounts repatriated in the pre-war 
period were, however, small and the schemes under which 
they were repatirated were voluntary in character. Even after 
the outbreak of the war, thase schemes remained in opera- 
tion for a year or so but after February 1941, two compul- 
sory schemes were brought into operation and it is under 

sterling payment by the British Government and sterling 
purchases made by the Reserve Bank during wai (upto March 1945) 
amounted in all to Rs. 1,936 crores of which Rs. 411 crores were untilised 
for repatriation schemes. 


these that almost the whole of the sterling debt of India 
was repatriated. 

The total sterling debt of India inclusive of railway 
stocks, debentures and annuities was 356 million or 
Rs. 475 crores at the end of 1936-37- Of this 322*84 million 
were repatriated upto the end of March 1945 including 
266*93 million of dated and undated stering loans and 
55*91 million of Railway Annuities and Railway Debenture 
Stock in the manner indicated in the following table : 

Face Value 
( million) 

Open Market Purchases ... 53'49 

License Scheme of 22nd February 1940 ... 2'02 

Compulsory Schemes : 

First ... 74*83 

Second ... 136"59 

Funding of Railway Annuities ... 27*06 

Repatriation of Railway Debenture Stock ... 28*85 

Total 322-34 

Repatriation of sterling loans of the face value of over 
260 million has been carried out by three methods: (i) open 
market purchases of sterling (M) the license scheme 
and (m) compulsory schemes. Under the open market 
purchaser which commenced in 1937-38, were suspended 
in 1038-39 but resumed the next year, 53*49 million of 
debt was repatriated. The Reserve Bank was authorised 
under this system to purchase Indian sterling non-termin- 
able securities in the open market out of its purplus sterling 
balances and to transfer the securities so purchased to the 
Government for cancellation. In their place additional rupee 
paper of 3J per cent and 3 per cent non-terminable loans 
was created which was issued gradually by the Bank in 
accordance with the requirements of the market. The 
second method, i.e., of license system was introduced on the 
22nd February 1940 and 2.02 million sterling were acquired 
under it. It consisted in offering the holders of sterling 
loans the option of converting their holdings into rupee 
securities. The rupee counterparts of six India terminable 


sterling loans were created and the holders of the loans 
were given the option of transferring their holdings from 
the books of the Bank of England to the Rupeie registers of 
the Reserve Bank. The difference between the two 
methods, Le^ the open market purchases an'd license system 

consisted in this that while under the first method the 
securities were purchased for cash and the Reserve Bank 
had to use its sterling balances, under the second, the holders 
were given the option ot conversion and, therefore, the use 
of sterling balanced was not required. The third method of 
repatriation i.e., of compulsory schemes, was used in Feb- 
ruary and December 1941 and 211'42 million of sterling 
debt war repatriated by this method upto the end of March 
1945. Under the first compulsory scheme brought into 
effect from the 8th February 1941, the British Treasury 
issued a vesting order on the 7th February 1941 requiring 
all residents in the United Kingdom to surrender their 
holdings of India's terminable sterling loans at prices fixed 
on the basis of market price on the 7th February and the 
Government of India issued a notification to the same 
effect requiring residents in British India to surrender their 
holdings of these sterling loans, payment being offered in 
rupee counterparts or cash at the holder's option The 
following loans were covered by the scheme : 5% 1942-47, 
4|% 1950-55, 4}% 1958-68, 41% 1948-53, 3i% 1954-59 and 
3% 1949-52. The total amount of debt repatriated under 
this scheme upto the end of March 1945 was 74*93 million. 
The second compulsory scheme which was announced on the 
24th December 1941 covered the following non-terminable 
sterling loans : 2| per cent stock 1926, 3 per cent stock 1948 
or after, and 3| per cent stock 1931, Notice for The repay- 
ment of the 3| per cent stock 1931 having a nominal value 
of 77 million was given to the holders and vesting orders 
were passed for the other two loans requiring their 
surrender and providing for the payment of purchase price 
in the same maner as under the first compulsory scheme. 
Upto the end of March 1945, 136"59 million of these loans 
had been repaid. . 

Besides this repatriation of sterling loans extending 
"over a period of more than five years, 55*91 million of 
sterling balances have also been used to fund the sterling 
obligations in respect of Railway Annuities and to repatriate 
Railway Debenture Stocks* 




24017 255*17 

Repatriation of sterling has had a very marked effect on 
the composition of India's public debt, the sterling portion 
of the debt having been very nearly wiped out and the 
rupee portion having more than doubled. The total sterling 
obligations were at the end of 1936-37 and 1944-45 Rs. 493 
crores and Rs. 67 crores respectively, the corresponding 
figures for rupee obligations being Rs. 707 crores and 
Rs 1781 crores. 

The following table shows the changes in the composi- 
tion of India's public debt : 

(In crores of rupees) 

1936-37 1936-39 1944-45 1945-46 

In India : (Revised) (BuddetJ 

Loans 437'33 437'87 1190^8 1484" 3 

Treasury Bills aud Ways 

and Means Advances ... 28'54 46'30 86.61 86 6l 

Unfunded Debt ... 219*93 22513 263'56 316'77 

Deposits (Depreciation 

and (Reserve Fund) ... 20 82 

Total obligations in India 706.62 
In England : ^ 


War Contribution 
Railway Annuities 
Unfunded Debt 

Total obligations in Eng- 
land ... 493-07 46912 6715 63*60 

Total Interest bearing Obli- 
gations ... 1199-69 1205*76 1848'47 2206'58 

Process of the Finance of Repartriat-ion of Sterling 

There are two stages in the operations by which the 
repatriation of sterling has been financed. In the first stage, 
sterling was acquired from the Reserve Bank to pay off the 
holders of sterling stock and in the second stage, rupees 
had to be obtained to pay for the acquired sterling. The 
first stage presented no difficulty because the Reserve Bank 
had ample resources in sterling which were made available 
to the Government. The second stage, however, was more 
complex because of the difficulty of borrowing immediately 

736-64 178T32 2142'98 



, 13-48 









2t) 01 






large funds in the Indian market. Operations of various 
kinds have been used to cover this stage. To the extent to 
which the sterling loans were held by Indian investors, 
direct payment was made in the form of rupee counterparts. 
As regards the remainder of the loans, it was either taken 
over by the Reserve Bank in the form of counterparts or 
was met out of Government balances or financed by ad hoc 
Treasury Bills and Ways and Means advances from the 
Bank. A part of the rupee counterparts of the repatriated 
sterling stock has been cancelled because it was considered 
to be in excess of the absorptive capacity of the Indian 
market. Cash payments on account of the cancelled 
counterparts were made almost entirely out of the proceeds 
of Defence Loans. Of the remaining counterparts, a very 
large amount was taken by the public in the forms of existing 
loans. For the balance rupee resources have been found 
from the Treasury Bills taken by the Reserve Bank, Ways 
and Means advances from the Bank, and Government 
balances. The amount of Treasury Bills sold to the Issue 
Department of the Reserve Bank and the Ways and Means 
advances taken from the Bank both increased greatly as a 
result of the financing of the repatriation operations. A 
natural consequence of the operations has been an increase 
in the rupee debt of the Government of India and in the 
rupee ^ interest charges- The net result of the various 
repatriation operations at the end of 1944-45 was that 
sterling debt of the value of about Rs. 430 crores 
had been repatriated, Rupee counterparts of the value of 
the Rs. 277 crores were created of which Rs. 200 crores 
were held by the public, Rs. 24 crores by the Reserve Bank 
of India and a little less than Rs. 3 crores by the Govern* 
ment- A little less than Rs. 142 crores of debt was cancelled 
on repatriation and Rs. 50 crores of rupee counterparts 

1 To facilitate repatriation operations, the Reserve Bank of India Act 
was amended in 1941 so as to enable the Bank to hold three-fifth of the 
total assets in the Issue Department in the Government of India rupee 
sccurites. The provision in Section 33 (3) of the Act, that the amount 
of such securities cannot exceed one-fourth of the total amount of 
assests or fifty crores of rupee, whichever amount is greater, was waved. 

* Budget Speech, 1943, para 47. Also Report on Currency and Finance 
1944-45, P. 69-71, 


were cancelled, bringing the consequent reduction in debt 

to Rs. 192 crores. 

Critical Appraisal of Repatriation Operations 

There is hardly any difference of opinion that the 
repatriation of sterling debt has been a well-timed and 
successful operation and has brought solid gains both to the 
United Kingdom and India. The gain to United Kingdom 
consists in the release of sterling resources which can be 
mobilised by the British Government for investment in 
British war loans- The gain to India lies, in the words of 
Sir J. Raisman, the ex-Finance Member of the Government 
of India "in the liquidation of external obligations which 
might prove an embarrassment in future and their replace- 
ment by internal debt." There has also been a substantial 
but temporary gain to the Indian revenues in so far as the 
holders of sterling stock were paid out of the short term 
obligations contracted by the Government of India at low 
rates of interest. But the more important and permanent 
gain to Indian revenues accrues by the heavy reduction in, 
what are known as, the Home Charges. The virtual dis- 
appearance of these charges removes one of the complicating 
factors in the Indian currency system- Furthermore the 
Government of India will now have to raise large rupee 
funds in India and this should impart the much needed 

strength to the Indian gilt-edged market which has suffered 
in the past from a plenitude of resources and inadequate 
demand. Above all, the repatriation of sterling has enabled 
India to pass at a stride, as it were, from the position of a 
debtor to that of a creditor country. 

Some doubts were raised in the beginning about the 
effects which large scale repatriation transactions may have 
on the sterling reserves of the Reserve Bank and through 
them on the value of Indian currency and on the credit of 
the Government of India. Whatever validity these doubts 
may have had in the past, they have none now that the 
Bank's assetS|are groaning under the weight of superabun- 
dant sterling. A more pertinent criticism of repatriation 


operations has been that the Government failed to purchase 
sterling loans at the most favourable rates and thus made 
these operations unduly expensive. This, however, overlooks 
the fact that sterling loans could be purchased or paid off 
only when the Government of India had sufficient amounts 
of sterling at their disposal and these did not accumulate 
until some time after the war. 1 In any case, there does not 
appear to have been any wasteful negligence on the part of 
the Government in carrying through these operations. 

1 For an illuminating argument on this point by Sir ] Raisman in 
reply to J. M. Mehta, see Leg, Ass. Debates, 1942, vol, I, pp. 778 87. 



The role of monetary policy in the management of the 
economic system which was emphasized by the Great 
Depression of 1929-33 has been heavily underlined by the 
recent war. There is no doubt that during war money func- 
tions more as a measure of costs and as an instrument for 
the required transfer of resources to war uses than as a 
governor of the economic system or an independent propell- 
ing force. Every effort is made to control it and make it 
subserve the general purpose of the war economy, for the 
imperative reason that the penalty entailed by failure to do 
so would be very heavy. But this apparently subordinate 
role of money during war does not in any way detract from 
the overpowering sway it normally exercises over the econo- 
mic system in regulating the direction as well as the speed 
of its expansion and contraction. It would indeed be diffi- 
cult to think of a smoothly functioning international econo- 
mic system or of a balanced economic advance for the world 

as a whole or for any individual country without properly 
managed money. 

Now that the possibility of financing a large scale total 
war involving tremendous financial costs without running 
into any major financial crisis or dislocation has been de- 
monstrated during the last few years, there can be some 
reasonable ground for the belief that the management of 
money on an international scale or what is the same 
thing, the setting up of a satisfactory international monetary 
system would not by beyond the grasp of statesmen and 
monetary experts. The money costs of the present war 


leave alone the costs not measurable in mone^ will be 
found, when the final computation is made, to have been 
staggering. They will certainly be far heavier than those 
of the last war which themselves amounted, according to 
some calculations, to over 70,000 millions. A good part 
of these costs was met by bringing into existence fresh 
stock of wealth through larger and more efficient production 
but a substantial part of them represented curtailment of 
consumption and private investment and depreciation and 
depletion of the existing capital equipment. Taken by 
themselves, they would point to smaller real income and 
lower standards of living as the lot of large sections of the 
world's population after the war. The prospect is, however, 
not so depressing as it might appear and it was not an 
unduly optimistic note which the late Lord (then Mr,) 
J. M- Keynes struck when he said to the British people in 
November, 1940 : "Stop thinking that after the war we 
shall have to lower our standards of life- I see no likelihood 
of that. On the contrary I hope that we shall have learnt 
some things about the conduct of currency and foreign 
trade, about central controls, and about the capacity of the 
country to produce, which will prevent us from ever relaps- 
ing into our pre-war economic morass." 1 It must be obvious, 
however, that to achieve any large advance in the living 
standards after the war, a clearer insight into the working 
of national economic systems combined with a rational 
operation of state controls alone would not suffice ; the 
whole of the machinery of international trade, exchange and 
investment would have to be restored and made to function 
more satisfactorily than before. Schemes of post-war 
economic reconstruction will, therefore, defeat their own 
end if they are not firmly broadbased on the widest in- 
ternational economic co-operation and goodwill 

The foremost place in any agenda for the post-war 
world must, therefore, rightly be given to the institution of 
a sound international monetary arrangement. Proposals 

1 Full text of a Broadcast reproduced in The Statesman. Nov. 21, 1940. 


for such an arrangement were put forward by the monetary 
experts of Great Britain, U. S. A- and Canada and remained 
for more than one year under discussion. The proposals 
were not an expression of a sudden yearning of war-weary 
people for a better monetary system; they marked, on the 
other hand, a further step in the intellectual process of 
groping that has gone on during the whole of the inter-war 
period (1919-39) for a sound international monetary 
stucture. It may be helpful to review briefly the events of 
these twenty years as a preliminary to the statement and 
examination of the proposals for international currency. 

Among the many changes brought about by the war of 
1914-18 an important one was the suspension of gold stand- 
ard by most of the countries. At the end of the war only 
a few countries such as the United States and Sweden 
adhered to gold and that, too, more in name than in effect. 
For over forty years gold had functioned as the common 
basis of currencies and provided to the world a reasonably 
stable measure of values as well as an integrated structure 
of prices and money incomes. Whether gold standard was 
wholly automatic in operation may be doubted but two 
advantages that were claimed for it by its supporters could 
not be denied even by its worst detractors. It prevented 
the prepetual interference with currency systems by govern- 
ments acting under political pressure and it greatly facilita- 
ted the conduct of international commercial and financial 
relations. Besides, there was no satisfactory alternative to 
it in sight. The only feasible course in 1918, therefore, 
appeared to be to heave the currencies back to stability and 
anchor them to gold. This was by no means an easy task, 
for currencies broken loose from gold had greatly expanded 
and in some countries such as Germany, Austria and 
Hungary, expansion was growing into inflations of very 
serious dimension bringing in its wake serious economic 
and social consequences. The period from 1919 to 1925 
was, therefore, one of confusion, uncertainly and instability 
accompanied, of course, by international conferences (at 
Brussels in 1920 and Genao in 1922) to formulate principles 


and procedures for currency reform and by policies and 
measures to give effect to them. The general objective of 
the measures of currency reform was the restoration of gold 
standard at preferably the pre-war parity. The late Lord 
(then Mr.) J. M. Keynes who advocated the adoption of a 
managed currency at the time found very few supporters 
even in his home country. In April 1925, Great Britain 
retuned to gold standard at the pre-war parity and between 
1925 and 1928, almost all the leading countries including 
France, Italy and Germany restored th<> gold basis of their 
-currencies The restored gold standard functioned upto 
1931 when it again broke down. 

Between the gold standard of 1915-31 and the pre-1914 
gold standard there were important points of difference both 
in respect of internal structure as well as the external 
environment. A distinctive feature of the structure of the 
gold standard during 1925 31 was the con siderable 
economy practised the use of gold in various was: by 
abandoning the use of gold coins, by fixing a reasonably 
large minimum for the amount of gold bullion which could 
be demanded in exchange for paper currency and adopting 

the system of keeping the whole or part of the gold reserves 
in the form of balances in foreign countries Whose 
currencies were based on gold. 1 Another feature was the 
greater element of management or conscious control in 
contrast with the more automatic operation of the pre-war 
standard. Under the pre-war system, export and import 
of gold acted as automatic correctives to exchange 
fluctuations and to diseqilibrated balances of payment by 
altering the relatives price levels but under the restored 
gold standard gold exports were offset' and gold imports 
Sterilized 1 so that the discquilibium was not speedily 

J But in spite of these economies, the view was held that reserve 
ratios of centralbanks were too high and that the world production of 
gold was not keeping pace with the demand for it. Moreover there was 
a maldistribution of gold creating scarcity in some countries. Cf Cassel's 
Crisis in the World's Monetary System, 1932, also Gregory : The Gold 
Standard and its Future, 1934 pp. 36-37. 


corrected- The discount policy of the central banks, too, 
was not used in the same way as before the war to anticipate 
and prevent gold movements- 1 A further feature of the 
post-war gold standard was the complication introduced in 
its working by the short-term balances *hot money' as 
they came to be calledheld by countries in general in other 
countres. Whenever confidece was shaken by political 
uncertainty or other causes, these balances were moved from 
one country to another, causing gold outflows and disturbing, 
even imperilling, the whole basis of currency and cradit. 
Equally great was the complication caused by the adoption 
of exchange parities which either over-valued or under 
valued the currencies of different countries and caused the 
greatest strain on their balances of payment. Moreover, 
the dominating position which London held before 1914 as 
the financial centre of the world was undermined after the 
war so that the excess and deficit balances on international 
account of different countries could no longer de cleared 
with the former facility or automatism. But, perhaps, even 
more important than these structural changes in gold 
standard was the wholly transformed environment in which 
it was to function. It was an environment highly-charged 
with economic nationalism and characterised by an all-round 
rigidity of costs, prices and interest-bearing obligatons. Gold 
standard, as is well known, is a symbol as well as an instru- 
ment of monetary internationalism and can hardly fit in 
with narrow nationalistic commercial and monetary policies. 
Nor does it fit in with a whole complex of valorisation 
schemes, monopoly price fixations, cartels, pools, trade 
union-controlled wages and inelastic governmental ex- 
penditure; for it demands a fair measure of flexibility in the 
matter of the adjustments of domestic prices, wages and 
contractual obligations to the fixed norms of exchange. 

It could not be expected that set in the context of such 

1 Robbini : The Great Depression, (p. 28 et seq). In U.S.A. complaint 
was made that the pound went off gold in 1931 with the Bank rate at no 
more than 4i per cent. 


conditions the gold standard would function smoothly or 
effectively. It is possible, however, that it might have con- 
tinued to function for some time after 193i had the Great 
Depression which started in 1929 not released forces which 
hastenep its downfall- The heavy fall in prices, particularly 
of agri cultural commodities, put a heavy strain on the 
balance of payment of debtor countries and led to the 
intensificatian of trade and exchage restrictions culminating 
in defaults, moratoria, depreciation of currencies and 
abandonment of gold. These measures taken by the deb 
tor countries had their inevitable repercussions on other 
countries and led to defensive action on their part. Great 
Britain who was finding her gold reserves running down due 
to withdrawal of short-term funds and was experiencing, 
with an over-valued pound, an adverse trend in her balance 
ot payments sought relief by departing from gold standard 
on September 21, 1931. This became a signal for other 
countries to leave gold or devalue their currencies. A bloc 
of European countries comprising France, Belgium, 
Netherlands, Italy, Switzerland and Poland, however, 
decided to stick to gold standard. Germany also remained 
on gold though only in a nominal sense- Defections from 
the gold bloc began to take place from 1934 onwards and 
by the end of September 1936, the last fortresses of gold 
had surrendered. Taken as whole, the decade from 1929 
to 1939 was characterised by a decided* trend towards 
disintegration of international monetary reltioans and 
the growth of a network of nationally controlled 
and operated systems, devices and arrangements such as 
exchange control, exchange clearing and stabilisation and 
equalisation funds 1 . That the statesmen and thinkers were 
not unaware of this trend or of its definitely depressing 
effects on trade and preduction was evident from the 
attempts that were made at intervals to find a basis 
for international monetary stabilisation- 8 Though 

1 Ropke gives a succinct analysis of this trend and its effects (Cf. his 
Inteanational Economic Disintegration, 1942, pp. 191-97). 

2 For example, the World Monetary and Economie Conferece held 
in London in June, 1933 had currency stabilisation as the ehief item on 
its agenda and in 1936 the Tripartite Currency Agreemets signed by 
U. S. A., France and England established de facto dollar- franc-pound 
exchange stability. 


no international agreement could be reached in this regard, 
monetary stability was attained over limited areas by setting 
up currency blocs (such as the sterling area) and by arriving 
at currency agreements among groups of countries. 

From this brief review of the monetary developments 
of the two decades of inter-war period it would be clear 
that the smooth flow of economic operations is both a 
necessary condition and a natural result of a smoothly 
operating international monetary mechanism. The synchro- 
nisation of periods of rapid economic expansion with 
monetary stability and those of slow advance with monetary 
instability is not fortuitous- The tidal sweeps in the 
volume of business activity, the alternation of prosperity 
and depression, which lend to the economic system an 
appearance of chronic instability can be attributed very 
largely to monetary causes. Even when they are not so 
attributable, they may be found to be amenable to treatment 
by monetary remedies. 

Reference may be made here to one fact of considerable 
significance. Even during the period of the suspension of 
gold standard, the economic and monetary thought fas 
reflected in the published works of major importance) was 
concentrated more on analysing and defining the conditions 
necessary for its restoration than on discovering a substitute 
for it. 1 Among these conditions were included the satisfac- 
tory settlement of war debts and reparation questions, the 
removal of the odious prohibitions, restrictions and res- 
traints on international trade, the restoration of the 
automatic action of gold movements on price levels* con- 
tinuous co-operation among the central banks to lower their 
reserve ratios and for other matters of common concern, 
control over the movement of short term foreign balances 
and also over the volume of foreign lending and a direct 
attack on the rigid elements in the national economic 
structures. The discovery of means by which the demands 
of internal wage, investment and employment policies 
could be harmonized with the fixed exchange rates of the 
gold standard was indeed considered one of the primary 

i An alternative to gold standard which implies both stable and 
free exchanges was, of course, a regime of stable but controlled exchanges 
but the latter could hardly be called a substitute for the former, 


pre-requisites for going back to gold. Given these condi- 
tions, gold standard could be successfully re-established ; 
without them, all talk of gold standard or, for that matter, 
of any international monetary system was useless. After 
all, the world could not have an international monetary 
system 'unless it showed itself deserving of it by manifest- 
ing a truly international spirit 1 . 

Gold standard, whatever its shortcomings, had the 
merits, given certain conditions, of being international in 
character, impersonal in management and automatic in 
operation 1 . These minimum qualities must belong to any 
institutional arrangement that may be set up to take the 
place of the old gold standard. But there are a few more 
norms in terms of which such an arrangement may be 

judged. For instance, it will be expected to carry through 
smoothly the transition from war to peace. And when that 
has been accomplished, it will have to provide a smooth 
and effective procedure for clearing international balances 
of payment, ensuring the unimpeded flow of capital to the 
less developed areas of the world and assisting in bringing 
about a steady and unbroken advance in the material 
standards of living all over the world- Furthermore, it 
must be neutral between creditors, and debtors, must not 
be linked too closely to gold and must not hamper, by 
imposing uniform rates of economic advance, rapid economic 
progress of the less developed areas of the world. 

From these general observations one may pass on to 
sketch short outlines of the three currency plans which 
were put forward by the British, American and Canadian 
monetary experts respectively in the earlier months of 1944. 


The three post war currency plans separately drawn up 
by the British, American and Canadian experts were an 
earnest of their desire to protect the peace from currency 
chaos and muddle and place it on an enduring foundation. 

1 One of the obvious shortcomings in the mechanism of the goJd 
standard was that if gold-receiving country began to 'sterilize* gold, the 
automatic check to gold inflow did not operate so that the gold-losing 
country went on losing gold until it rescued itself from the disaster of 
falling prices, shrinking money incomes and growing unemployment by 
going off gold. 


They were declared to be tentative and provisional and sub- 
ject to modification and the American plan was reissued 
twice in a revised form. All of them present in clear out- 
line the administrative arrangements for operating an inter- 
national monetary system. Combining broad feautures 
with fairly profuse detail and representing, as they do, a 
new venture of thought into the field of economic inter- 
nationalism, they provide somewhat taxing reading. To 
bring out the distinctive features of each plan, only the 
barest outline need be given here. 

The British Plan 

The British plan 1 which bears the stamp of the genius of 
the eminent British economist, the late Lord Keynes, sets 
before itself the object of providing a mechanism of interna- 
tional currency, which is non-political, elastic and 
equilibrating in character. It seeks to create a substance 
of international currency which is not subject like gold to 
the unpredictable fluctuations arising from changes in world 
production of gold and the gold reserve polices of different 
countries. The concrete mechanism proposed in the plan 
is an International Clearing Union and the unit of in- 
ternational currency, Bancor. 

The (proposed) International Clearing Union will be an 
international organisation with the United Nations as its 
original members, the other states, iucluding the ex-enemy 
States, being invited to join subsequent?. The direction 
of the affairs of the Union will vest in a Governing Board 
appointed by the Governments or the member States- 
The responsibility of each member in the management of 
the Union will depend on the quota assigned to it, this 
quota being a kind of numerical measure fixed with refer- 
ence to the sum of each contry's pre-war exports and 

The ( proposed ) international currency will be Bancor, 
the value of which will be fixed in terms of gold by the 

1 Proposals for an Intentrnational Clearing Union, 1943. 


Governing board of the Union and which will be accepted 
by all the members of Union as the equivalent of gold 
for the purpose of settling international balances- The 
initial values of the currencies of member States in terms of 
bancor will be settled by arrangement and subsequent 
alteration will be allowed without the permision of the 
Governing Board of the Union. No member state will 
purchase or acquire gold at a price which does not corres- 
pond to the value of its currency in terms of bancor and the 
value of bancor in terms of gold. A member state will be 
entiled to obtain a credit balance with the Union in terms 
of bancor by paying in gold but will not be entitled to 
demand gold against a balance of bancor. 

The centre of interest in the plan is, of course, the 
method of operation, the procedure by which the debit and 
credit balance on international account will be cleared off 
by the member states of the Union. The essential idea 
underlying the Union is to extend the principle of banking 

as exhibited within an isolated single nation to the wider 
international field. The credits and debits, by this principle, 
will necessarily be equalised because both the creditor and 
the debtor will receive and make payment within the orbit 
of an international monetary institution, namely the Union. 
A creditor State will accept payment of currency balance 
due to it from other States in the form of a credit balance 
of bancor in the books of the Union. A debtor State can 
like wise borrow bancor from the * credit balance of any 
other member State- 

The American Plan. 

The preliminary draft of the U.S. Plan 1 worked out by 
Mr- Harry White, Monetary Adviser to the U S. Treasury 
Department, was put forward in April 1943, a rervised draft 
in July 1943 and a second revised draft in August, 1943- 
The provisions of the plan in its first draft may be briefly 
stated before noticing the changes made in the revised 

The plan is drawn up with reference to three objectives 

1 United States Proposals for a United and Associated Nations 
Stabilisation Fund, 1943 


viz, to prevent the disruption of foreign exchanges to avoid 
the collapse of monetary systems in the post-war period and 
to facilitate the restoration and balanced grouth of inter- 
national trade. It proposes, like the British Plan, the 
establishment of an organisation called the United and 
Associated Nations Stabilization Fund and the creation of 
an internationally acceptable unit of currency called 
* Unitas'. 

The Fund will be constituted of gold, currencies of 
member countries and securities of member governments. 
Each member country will subscribe to its ' quota ' which 
will be a certain amount of gold, its own currency and its 
government securities. The quata will be determined by a 
country's holding of gold and foreign exchange, the extent 

of fluctuations in its balance of payments and its national 
income, The aggregate oi all the quatas will be equivalent 
to at least 5 billion dollars. The Fund will be administered 
by a Board of Directors to which each Govenment will 
appoint a director and and alternate- The Board of 
Directors will select a Managing Director and one or more 
assistants. Voting power in the Board will be closely, 
though not proportionately, related to the quotas of 
member countries bat no country can have more than one- 
fourth of the total votes- 

The unit of account of the Fund will be the 'Unitas' 
which will be equivalent to 137} grains of fine gold, or 10 
U. S. dollars. In terms of this 'Unitas 1 or gold, the value 
of the currency of each member country will be fixed by the 
Fund and no member country may alter it without a four- 
fifths majority of member votes. This provision, it will be 

noticed, is intended to secure the stabilization of exchange 
rates between currencies of member countries and to 
prevent competitive depreciation. 

Closely akin to this provison is the one by which each 
member country will undertake, to abandon, as soon as 
conditions permit, all restrictions and controls over foreign 
exchange transactions. Each member will also undertake 
not to alter exchange rates fixed by the Fund except with 
the consent of the Fund and only to the extent and in the 
direction approved by the Fund. Further, each member 


country will undertake not to enter into any new blateral 
foreign exchange clearing arrangements or multiple currency 
practices except with the approval of the Fund. Each 
member country will also co-operate effectively with other 
member countries for purposes of regulating international 
movements of capital in accordance with the Fund's 

First Revised Draft The first revised draft of the 
American Plan introduces some important modifications in 
the original proposals. Among these, one that provoked 
the sharpest criticism in the British press is the change in 
the composition of quotas subscribed by member countries 
from 12| per cent in gold to 50 per pent in gold. Another 
modification is to 'the effect that the rates at which the 
Fund will buy or sell members* currencies will be 
fixed at the value of the curreucies concerned in terrrs of 
the U, S. dollar on 1st, July 1943. A further modification 
provides that exchange rates in the first three post-war 
years can be changed by a simple (instead of 4/5 ths) 
majority vote and that any country can during this period 
change its rate by 10 per cent either way after consultation 
with, but not necessarily with the approval of, the Directors 
of the Fund. 

Second Revised Draft: The second revised draft provides 
that only those countries whose gold and free exchange 
reserves exceed thrice their quota will have to pay 50 per 
cent m gold, others paying between 30 per cent and 50 per 
cent according to their holdings in gold and foreign exphange 
Some calculations regarding the distribution of voting power 
under this draft place the share of the British Empire at 20 
per cent (Great Britain alone at 10 per cent). ; United 
States 20 per cent, Russia, 6 per cent ; China, 3 per cent and 
India, 2'6 per cent. 

The Canadian Plan 

Canadian Plan for an International Exchange Union has 
emerged from a critical examination of the British and 
American Plan and claims to incorporate important features 


of both along with the addition of certain new elements. 1 
In the general observations made on the two Plans which 
precede the outline of the Canadian proposals, considerable 
stress is laid on the view that international monetary organi- 
sation, though a logical and convenient starting place for 
joint international action, cannot by itself provide a solution 
for several vital problems such as commercial policy 
international investment and prices of primary products. 
Such an organization, it is further held, should not be called 
upon to finanec measures for post-war relief and rehabilita- 
tion. It should be 'international rather than supernational', 
based on agreement for common purposes and advantages 
permitting quick withdrawal to any member choosing to do 
sc> and allowing the greatest scope for the pursuit of national 
economic policies in the interest of national welfare- Above 
all, it must make effective provision for the extension of 
credits to countries so that they may get time to make the 
necessary adjustments in their balances of payment without 
having to take recourse to bilaterally balancing trade and 
credit agreements, That inevitably means that its resources 
must be ample, though these resources should not be used 
to cover up-deep-seated and chronic maladjustments. 

The resources of the International Exchange Union 
proposed in the Plan aggregating 18,000 million dollars will 
be subscribed by the member countries by way offquotas,: 
the amount of quota of each country depending on such 
factors as international trade, national income, and holdings 
of gold and foreign exchange convertible into gold. At 
least 15 per cent of quota will payble in gold and the 
balance in national currency. To countries having less 
than $300 million in gold or foreign exchange convertible 
into gold, time may be given to pay up their gold contribu- 
tion. Quotas of particular countries may be charged from 
time to time, through no increase in the quota of any 
country will be made without the consent of its repeasen- 
tative. The Union will have the right to bortow domistic 
currency from member countries in amouts upto 50 per 
cent of their quotas. All gold and foreign exchange which 

1 Tentative Draft Proposals of Canadian Experts for an International 
Exchange Union, 1943. 


a member country acquires in excess of the amount held 
immediately after joining the Union will be sold to the 
Union, on its request, in exchange for local currency or 
foreign currencies. 

The monetary unit of the Union will be an international 
unit (called provisionally the Unit) consisting of 137] grains 
of fine gold. Member countres will fix in agreement with 
the Union the intial values of their currencies in terms of 
gold or the Unit and will undertake not to alter these 
values without the approval of the Union except in cases 
when they are considerable net purchasers of foreign ex- 
change and are entitled on that account to depreciate their 
currencies by 5 per cent (or even more with the approval 
of the Union). Deposits in terms of the Unit may be 
accepted by the Union against delivery of gold. They will 
be transferable to other countries, will be redeemable in 
gold and have a 100 per cent gold backing. 

The Union will be administered by a Governing Board 
to which each government will appoint a representative and 
an alternate. The Governing Board will select a Governor 
and one or more assistants. In the Union, each country 
will have 100 votes plus one vote for the equivalent of each 
100,000 Units of its quotas 


The monetary arrangement proposed in the three 
currency plans outlined above are now of more or less 

historical interest, for they have been superseded by the 
propsals formulated by the United Nations Monetary and 
Financial Conference held at Bretton Woods in July 1944. 
The proposals of the Conference will be examined in 4 
(below) but as they Were preceded by and arose out of 
the three currency plans, it will not perhaps be redundant 
to attempt a comparative and critical examination of the 
main features of the plans. Moreover the plans do retain 

In the previous edition of this book when the Bretton Woods 
Conference was yet nowhere in sight it was regarded as not unlikely 
that the currency plans might fade off like the Cheshire cat leaving 
behind only a grin! 



some value in so far as they reveal the distinctive lines 
of thought and approach among the monetary experts in 
different countries. 

A comparative appraisal of the three plans may be made 
with reference to the following ten items : (1) aims and 
objectives of the Plans, (2) nature of the proposed Inter- 
national monetary orgnisation, (3) condition of membership 
and management, (4) the mechanism for correcting 
disquilibrium, (5) the position of creditor and debtor coun- 
tries, (6) the position of gold, (7) the provision for fixation 
ot exchange rates and for exchage depreciation. (8) control 
of exchange and capitil raovemets and adoption of protec- 
tive device, (9) finance of post-war reconstruction, and (10) 
transfer af abnormal war balances. 

It may be pointed out at the outset that the Canadian Plan 
is very largely an elucidated version of the American plan, 
though it incorporates some features of the British Plan 
beside some of its own. All three plans have a fundamental 
similarity in their aims and odjectives in that they seek to 
establish an international monetary mechanism which will 
secure exchange stability, assist in the development of inter- 
national trade and allow sufficient scope to the countries 
to carry out policies for attaining a high level of employ- 
ment and incomes. In matters of organisation and proce- 
dure, however, they considerably differ. The" Clearing 
Union of the British Plan will not have any resources 
of its own to start with unlike the American Stabilisation 
Found or the Canadian Exchange Union both of which 
will have ample resources of their own derived from the 
contributions of members. This does not mean that the 
British Union will be organisationally less secure; for the 
manner of its operation will be quite different from that of 
the American Fund. It may, however, be admitted that 
the possession of resources does inspire a greater sense of 
security and in this respect the American Plan may well 
appear more attractive. As regards membership rights, 
share in management and benefits extended by the monet- 
ary institution, the British Plan has the merit (from the 
standpoint of a large number of countries) of not putting a 


premium on the possession of large quantities of goM. But 
it does tilt the balance of advantages in favour of certain 
countries for example, Great Britain herself by basing 
rights and privileges on figures of foreign trade. The 
American Plan does not offer a similar simple formula for 
determination of rights but is all the same less than fair to 
countries not possessing lar^e stocks of gold. When a num- 
ber of countries have to be brought into the international 
monetary institution, it will, of course, be difficult to devise 
a basis for membershipe rights which will satisfy all or will 
not weight the scales in favaur of some and for quite a 
considerable time the Governing Board of the institution 
will be on trail for its impartiality and disinterestedness. 
All three plans envisage a division of the countries into 
member and non-members but do not make clear the extent 
of membership that will be necessary to make them workable 
This recognition of non-members coupled with the facilities 
for members to withdraw frome the monetary organisation 
seems to open the door to a disastrous breakdown as in the 
cese of the League of Nations. 

The central features of plans are those relating to 
correction of disequilibrium in the balance of payment and 
the position of craditor and debtor countries The emergence 
of a position of disequilibrium of surpluses and deficits on 
current account is inseparable frome a dynamic interna- 
tional economy and all the currency plans provide for its 
correction in a manner weich does not overstrain the econo- 
mies of countries or disrupt the international monetary 
arrangements. The British plan allows a debtor on interna 
tional account to run into deficits upto a specified limit 
up to the full amount of its quota, though it will bring into 
operation various correctives much before that limit is reac- 
hed The American Plan similarly allows a debtor to go into 
deficit i e., by foregin currencies by paying up gold or its 
own currency up to a maximum of 200 per cent of its quota 
and provides for the application of checks before that limit 
is reached. As regrds craditors on international account the 
T The limit can be exceeded on approval by four-fifths member vote 
provided some specified conditions are satisfied. 


British Plan sets no limit to the accumulation of credits 
(except that it provides for a small charge of 1"2 per cent 
annum on bancor balances exceeding a certain amount). 
Advice will, however, be tendered by the Union as soon as 
the credit balance of a country exceeds half of its quota as 
to what measures it should take to reduce export surplus or 
increase its long term lending. Under the American Plan 
(where the mechanism is such that the accumulation of 
credits in foreign currencies by a country is accompanied 
by the depletion of the Fund's holding of that country's gold 
and currency) the accumulation of credits is limited to the 
intial contribution to the Fund. But the Fund can reple- 
nish its holding of a country's currency by borrowing with 
the consent of the Goverment concerned, i.e. the limit to 
the accumulation of credits can be extended. If. however, 
the Fund finds its holding of a currency running out, it can 
resort to a rationing of that currency, that is, it can . 
(indirectly) restrict the right of other countries to make 
purchases in that country 1 . The American Plan, therefore, 
provides for a more limited accumulation of credit balance 
by a country or, what amounts to the thing, a more limited 

accumulation of debit balances by other countries to it. 
There is some justification in this sense for describing it as 
a Creditor's plan'. Similarly, the British Plan which does 
not restrict in the same manner the accumulation of credit 
balances of a country (i.e,. debit balances by other countries 
against it) may with some truth be called a 'debtor's plan.' 
The point is of very great practical importance because 
after the war a number of countries would be anxious to 
make large purchases in the United States and would like 
to avail themselves of a method of payment which does not 
impose deflationary pressure on their economies. This 
would be possible only if the United States makes it possi- 
ble for other countries to obtain dollars by either selling 

1 The Candian Plan, which also provides for rationing of scarce 
currencies, goes a step further in making it clear that restrictions impo- 
sed by member countries on the imports of goods from a countrs whose 
currency is rationed will not be regarded as constituting an infection of 
the most favoured nation obligations of commercial treaties (except 
under certain conditions). 


goods to her or borrowing from her or by paving up their 
own currencies will accumulate as a credit balance in 
favour of United States in an internatioral moretary 
institution. Another point to note is that under the 
American Plan, the ability of a creditor country to make 
purchases from another creditor country is much less than 
under the British Plan. A bancor balance with the Union 
can be used to make purchases in any country but the 
Fund will provide freely only those foreign currencies of 
which it will has a goodly amount G',e. f of debtor countries). 

Gold is assigned a place of honour under all the three 
plant but perhaps more so under the American and the 
Canadian than the British Plan- Under the British Plan there 
is oneway convertiblity of gold; for while bancor can be had 
freely in exchange for gold, gold will be given out only to 
creditor countries ( at the discretion of the Union; in 
extinction of their surpluses. Under the American Plan, a 
part of the intial contributions to the Fund will be made in 
gold and the Fund can buy and sell gold and accept deposits 
in gold. It is not clear, however, whether the Fund must 
accept gold in exchange for tinitas deposits and thus ensure 
two-way convertibility of gold. The international currency 
unit will be equivalent to a defined quantity of gold under all 
the plans but while the gold equivalent of unitas and unit is 
specified in the Hans, that of bancor will be fixed by the 
Union. Under all the schemes the gold equivalent is 
alterable a necessary and admirable provision for insulating 
the world price and credit structure from fluctuations in 
world gold production 1 As all the Plans provide for the 
fixation of the intial exchange rates of member currencies 
in terms of the international currency unit, exchange rates 
of currencies in terms of one another and in terms of gold 
will be settled simultaneously. The fixation of intial 
exchange rates of currencies will, of course, demand the 
greatest care and in this respect the British Plan and the 
revised American Plan allow scope for adjustment in the 

'To regulate the purchasing power generated by the system itself, the 
British Plan provides for reduction and resortation of the quotas of 
member countries The American Flan also provides for changes in 
quotas but is less clastic on the whole in respect of this provision. 


first few years of the operation of the Plan. The American 
Plan will, however, fix them to begin with at the level ruling 
in July 1943. In the matter of the depreciation or appre- 
ciation of exchange, the original American Plan is more rigid 
than the British or the Canadian Plan both of which 
provide for appreciation as well as depreciation, the extant 
of depreciation being 5 per cent, for a debtor country 
without consulting the monetary authority and more in 
consultation with it. The first revised version of the 
American Plan, however, does tone down the rigidity by 
providing for a 10 per cent change either way in exchange 
lates. In appraising this provision of the Plans, it may be 
borne in mind that some amount of latitude in the 
matter of exchange depreciation (or apprecition) will have 
to be allowed if countries in different stages of economic 
development and having different rates of economic 
advance are to be brought together with in the framework 

an international monetary organisation. It is, of course, 
true that the wider and more general this latitude, the less 
is its utility to countries who need it most. 

In respect of exchange control, the plans show consider- 
able divergence. The American and the Canadian plans 
envisage an early abandonment of all restrictions and 
controls over foreign exchange transactions (other then 
those involving capital movements) and also prohibit new 
bilateral exchange clearing and multiple currency practices 
while the British plan considers further extension of ex- 
change control ''consonant with the general purposes of he 
clearing Union 1 ' and envisages the continuance of currency 
blocs of counteries like, for example, the sterling area- As 
regards the control of capital movements by the national 
governments, the British Plan affirms its necessity but does 
not consider it essential to the operation of the Union 
while the American and Canadian plans make definite 
provision for it. As regards protective devices such as 
import duties, barter trade agreement etc., the British Plan 
contemplates their adoption under certain circumstances 
but expects coutries not to have them as a general rule. 
The American and the Canadian plans do not make any 
mention of them. 


The plans also differ as regards the extent to which the 
proposed international monetary organisation will be called 
upon to assist in the task of post-war relief and reconstruc- 
tion. The British Plan provides for grant of overdraft faci- 
lities by the union as a substitute for or as a supplement to 
any alterntive provision for relife finance. The American 
plan envisages a separate agency for the purpose while the 
Canadian plan is definate that any monetary organization 
which is set up should not be called upon to finance relife 
and rehabilitation. Obviously the American and Canadian 
Plans are in this respect more sensible. The Plans, however, 
agree in recognising that seprate agencies will be necessary 
to provide long-term fiinance and stabilise the prices of 
primary commodities. 1 

The problem of liquidating post-war blances has engaged 
attention in all the plans but the American and Canadian 

plans are more dfinite in their proposals in this regard than 
the British. The British Plan mentions the need of some 
provision by which the Union could help in coverting 
these balances mro bancor without imposing an evcessive 
strain on the bancor resources of the debtor country. The 
American and the Canadian plans, on the other hand, lay 
down a detaild procedure by which the monetary authority 
might purchase a portion of these balances from the country 
to which they belong and thereafter the country where they 
are held as well as the country transferring them might 
repurchase them from the monetary authority over a number 
of years. 

The general impression one is left with after a persual of 
the plans is that the British plan has a larger element of 
flexibility than the American and demands in some respects 
a smaller restriction of the area for national economic 
polices and national discretion. The American plan, on the 
other hand appears to have a solid structure and faces up 
to some issues with greater directness. Both are necessarily 
coloured by the general outlook of the framers regarding 
1 An agreement to set up a separate relief organisation called the 
United Nations Relief and Rehabilitation Administration was signed on 
November 9 1943. The resources cf the Administration are derived 
from the contributions ot the member governments which have been 
fixed at one per Cent of the national income of each country 


currency problems. Both embody long-term proposals and 
do not address themselves to the problems and conditions 
of the confused transitional period of the early post-war 


The proposals embodied in the three currency plans were 
discussed at a high technical leval by the experts of thrity- 
four nations in the United States and as an out come of these 
discussions a new scheme called the International Monet- 
ary Fund scheme was put forward in April 3944. This 
scheme represented in some ways an enormous advance 
over the Keynes and White plans and was generally more 
acceptable in principale to the experts of the united Nations. 

The purposes and objectives of the Fund were to be 

virtually identical with those of the Keynes and white plans ; 
viz, the promotion of international monetary cooperation, 
facilitating the expansion and balanced growth of interna- 
tional trade and contributing in this way to the maintenance 
of a high leval of employment and real income, the promo- 
tion of exchange stability and the avoidance of competitive 
exchange deprecation. The subscriptions to the Fund which 
were to be in the form of quotas assigned to United and 
Associated Nations totalled up to about 8 billion (or $10 
billion for the world as a whole). Twenty-five percent of the 
quota of each member was to be in the form of gold. On 
specified and well-defined conditions being fulfilled, a 
member country was to be entitled to buy another member's 
currencey from the Fund One of these conditions was to 
be that the Fund's total holdings of the offered currency 
should not increase by more than 25 percent of the member 
quota during the previous twelve months and should not 
exceed 200 per cent of the quota. Another condition was 
that the Fund's holdings of the currency demanded should 
not have become scarce. 

The par value of a member's currency was to be fixed in 
agreement with the Fund and was to be expressed in terms 
of gold. Changes in the par value could be made only in 
consultation with the Fund and to correct a fundamental 


disequilibrium. The Fund was not to reject a requested 
change because of the domestic, social or political policies of 
the country applying for a change- A change upto 10 per 
cent could be made by a member country after consulting 
the Fund but a further change was to be subject to exami- 
nation and consideration by the Fund- 

A member country was not to use the Fund resources to 
meet a large or sustained outflow of capital, though capital 
transaction of reasonable amount required for the expansion 
of exports or in the ordinary course of trade, banking and 
other business were allowed. 

In the event of Fund's holding of a particular currency 
getting scarce, the fund was to apprise member countries of 
the situation and to propose and adopt an equitable method 
of apportioning the scarce currency. Any member country 
could, after consultation with the Fund, adopt whatever 
measures it considerd suitable to restrict exchange opera- 
tions in the scarce currency or to limit the demand for it. 

The Fund was to be governed by a Board on which each 
member wa& to be represented and by an Executive Commi- 
ttee. The Committee was to consist of at least nine mem- 
bers including representatives of the five countries with the 
largest quotas The distribution of voting power on the 
Board and the Executive Committee was to be closely 
related to the quotas. 

The members of the Fund were to accept, among other 
obligations, the obligation not to impose restrictions on 
payments for current international transactions with other 
member countries and not to engage in any discriminatory 
currency arrangements or multiple currency practices with- 
out the approval of the Fund. 

The Fund was not intended to provide facilities for relief 
or reconstruction or to deal with international indebtedness 
arising out of the war- 

During the early post-war transition period, the member 
countries were to be allowed to maintain exchange regula- 
tions of the character which had been in operation during 


thz war but were to undertake to withdraw, as soon as 
possible, any restrictions which impeded multilateral clearing 
on current account. Not later than three years from the 
coming into operation of the Fund, any member country 
retaining exchange restrictions or discriminatory currency 
practices was to consult ths Fund as to their further reten- 
tion. No member country was to be required to assume 
obligations of the Fund until it could make satisfactory 
arrangements to facilitate a settlement of its balance of 
payment difficulties arising out of the war. 

In several respects the scheme of the International 
Monetary Fund was recognised to be an improvement on 
the British and American currency plans. In the first 
place, it placed part of the responsibility for adjustments 
on the shoulders of surplus instead of deficit countries by 
permitting member countries to curtail imports from a 
country whose currency had become scarce. Secondly, it 
allowed greater latitude to countries in the matter of 
effecting changes in exchange parities. Beyond an initial 
variation of 10 per cent which could be made unilaterally, 
any further change was to require the approval of a simple 
majority of the member countries. Thirdly, it was made 
clear that the Fund must accept the domestic, social or 
political policies of a member country as facts of the 
situation to be accepted and not criticized. Fourthly, it 
made a definite provision for transitional arrangements in 
the post-war period by allowing the member countries to 

assume the obligations of the Fund only when their balances 
of payment were sufficiently free from uncertainties and 


These proposals for the International Monetary Fund 
were in no way binding on the countries whose technical 
experts participated in the discussions leading up to them. 
They were to be placed before and approved by the delega- 
tes of the United and Associated Nations in a formal 
conference. This was the genius of the United Nations 


Monetary and Financial Confefence which met at Bretton 
Woods in New Hampshire, on the borders of Canada, 
from July 1 to July 22, 1944. Forty-four nations participated 
in the deliberations of the conference through their delega~ 
tions of varied size and composition, the American, British, 
Russian, Chinese and Indian delegations being headed, 
respectively by Henry Morgenthau Junior, Secretary of the 
Treasury, the lite Lord Keynes, Director. Bank of England, 
M. S. Stepanov, Deputy People's Commissar for -foreign 
trade, Hsiang-Hsi Kung, Vice-President of Executive Yuan 
and Sir Jeremy Raisman, Member for Finance. 

The proposals formulated at the Conference were em- 
bodied in the text of its Final Act and cover the agreements 
relating to the International Monetary Fund and the In- 
ternational Bank for Reconstruction and Development. The 
provisions of the two agreements may be taken up separa- 

1 The International Monttary Fund 

The Agreement to set up the International Monetary 
Fund will come into force when it has been signed on 
behalf of governments having sixty-five per cent of the 
total quotas but in no event before May 1, 1945. 
Objectives and Purposes 

The purposes of the Fund are ro promote international 
monetary co-operation, facilitate rhe expansion and balanced 

growth of international trade, promote exchange stability, 
assist in the establishment of a multilateral system of 
payments, make available resources to member countries 
in order to enable them to correct maladjustments in their 
balances of payments and to shorten the duration and 
lessen the degree of disequilibrium in the international 
balances of payments of members. The Fund is not 
intended to provide facilities for relief or reconstuction 
or to deal with international indebtedness arising out of 
the war. 

Membership, Quotas and Management. 

The original members of the Fund are to be those of 


the forty-four nations represented at the Bretton Woods 
Conference whose governments accept membership before 
31st December, 1945. Governments of other countries will 
be admitted to membership on such terms as the Fund may 
prescribe. Any member may withdraw from the Fund at 
any time by giving a notice in writing and any member who 
persistently fails to fulfil his obligations may be asked to 

The each member country will be assigned a quota which 
will be subject to review and readjustment at intervals of 
five years and, with the consent of a member, even earlier. 
The subscription of each member will be equal to its quota 
and will be paid as follows : twenty-five per cent of the 
quota or ten per cent of net official holdings of gold and 
United States dollars (whichever is less) in gold and the re- 
maining seventy-fiive per cent either wholly in the member's 
own currency or partly in currency and partly in securities. 
The quotas actually assigned to the United Nations re- 
presented at the conference vary from 2750 million (United 

States) dollars for U. S- A. to 5 million dollars for Panama 
and Siberia. The first six countries come in the following 
order : U. S. A (2750) ; U K. (1300) ; U, S. S. R. (1200) ; 
China (550) ; France (450) and India (400). 

The management of the Fund will vest in a Board of 
Governors, Executive Directors, a Managing Director and 

a staff. The Board of Governors which will be the custodi- 
an of all the powers of the Fund will consist of one governor 
and one alternate appointed by each member. Except in 
specified cases, the decisions of the Fund will be made by a 
majority of the votes cast. The Executive Directors to 
whom powers will be delegated by the Board will conduct 
the general operations of the Fund and will not be less than 
twelve of whom five will be appointed, one by each of 
the five members having the largest quotas and seven 
elected. The Managing Director who is not to be a 
governor or an executive director will be selected by the 
Executive Directors and will be the chairman of the 
Directors with no right to vote except in case of an equal 
division. In appointing the staff, the Manging Director 


will, consistently with the maintenance of efficiency, have 
due regard to geographical distribution. 
Determination and Variation of Exchange Parities 

When the Fund is in a position to start operations, it 
will request the members to communicate the par values 
of their currencies and if such values are considered unsatis- 
factory, the Fund will in consultation with each member 
determine the par value its currency. The par value of the 
currency of each member will be expressed in terms of gold 
or in terms of the United States dollar of the weight and 
fineness in effect on July 1, 1944. All dealings in foreign 
exchange and purchases of gold by the members will be 
based on the par values and each member will undertake to 
promote exchange stability and to avoid competitive 
exchange alterations, 

Changes in par values will be allowed only on a proposal 
made by a member and in consultation with the Fund. The 
Fund will not object to, a proposed change if it does not 
exceed ten per cent of the initial par value. It may agree 
or object to a further change of 10 per cent or more of the 
initial par value but will make its attitude known to the 
member concerned with in a definite period. No proposed 
change will be allowed unless it i? necessary to correct a 
fundamental disequilibrium and no such change will be 
objected to because of the domestic social or political 
policies of the member proposing the change Uniform 
proportionate changes in the par values of the currencies 
of all members may be made by the Fund by a majority 
Obligations in Respect of Restrictive Exchange Practices 

Except under certain specified conditions, no member 
will impose restrictions on current payments without the 
approval of the Fund nor engage in any discriminatory 
currency arrangements or multiple currency practices. 
The specified conditions under which exchange restrictions 
may be imposed or maintained are : (0 when the Fund s 
holdings of a member's currency become scarce (in which 
case other merrbers may, in consultation with the Fund, 


temporarily impose limitations on the freedom of exchange 
operations in the scarce currency) and (if) the post-war 
transitional period (during which the members may main- 
tain and adapt to changing circumstances exchange 
restrictions). In both the cases the restrictions are to be 
relaxed and removed as rapidly as conditions permit. 
Members are allowed to exercise such controls as are 
necessary to regulate international capital movements. They 
may also impose restrictions on exchange transactions with 
non-members unless such restrictions are contrary to the 
purposes of the Fund. * 

Operations of the Fund. 

In entering into transactions with the Fund, each member 
will act through its Treasury, central bank, stabilization 
fund or other similar agency. The Fund will sell the cur- 
rency of a member country in exchange for another member 
currency or gold, subject however, to certain specified con- 
ditions which may be waived in particular cases. Of these 
conditions, the first relates to scarce currencies. In this case, 
i.e., when the Fund's holdings of a currency become scarce, the 
Fund will make a formal declaration to that effect and pro- 
ceed to apportion the supply of scarce currency according to 
the relative needs of members. The second condition is that 
the Fund's holdings of the purchasing member's currency 
should not exceed two hundered per cent of its quota nor 
increase by more than twenty-five per cent of its quota 
during the period of twelve months preceding the date of 
purchase. The third condition is that the resources of the 
Fund should not be used in a member country to the 
purposes of the Fund. 

Any member may purchase the currency of another 
member by the sale of gold to the Fund. It may also re- 
purchase by tendering the gold to Fund any part of the 
Fund's holdings of its own currency in excess of its quota. 
At the end of each financial year of the Fund, a member 
will use a specified part of its monetary reserves to re- 
purchase from the Fund the Fund's holdings of its own 


will, consistently with the maintenance of efficiency, have 
due regard to geographical distribution. 
Determination and Variation of Exchange Parities 

When the Fund is in a position to start operations, it 
will request the members to communicate the par values 
of their currencies and if such values are considered unsatis- 
factory, the Fund will in consultation with each member 
determine the par value its currency. The par value of the 
currency of each member will be expressed in terms of gold 
or in terms of the United States dollar of the weight and 
fineness in effect on July 1, 1944. All dealings in foreign 
exchange and purchases of gold by the members will be 
based on the par values and each member will undertake to 
promote exchange stability and to avoid competitive 
exchange alterations, 

Changes in par values will be allowed only on a proposal 
made by a member and in consultation with the Fund. The 
Fund will not object to a proposed change if it does not 
exceed ten per cent of the initial par value- It may agree 
or object to a further change of 10 per cent or more of the 
initial par value but will make its attitude known to the 
member concerned with in a definite period. No proposed 
change will be allowed unless it is necessary to correct a 
fundamental disequilibrium and no such change will be 

objected to because of the domestic social or political 
policies of the member proposing the change Uniform 
proportionate changes in the par values of the currencies 
of all members may be made by the Fund by a majority 

Obligations in Respect of Restrictive Exchange Practices 

Except under certain specified conditions, no member 
will impose restrictions on current payments without the 
approval of the Fund nor engage in any discriminatory 
currency arrangements or multiple currency practices. 
The specified conditions under which exchange restrictions 
may be imposed or maintained are : (0 when the Fund's 
holdings of a member's currency become scarce (in which 
case other meirters may, in corsultation with the Fund, 


temporarily impose limitations on the freedom of exchange 
operations in the scarce currency) and (w) the post-war 
transitional period (during which the members may main- 
tain and adapt to changing circumstances exchange 
restrictions). In both the cases the restrictions are to be 
relaxed and removed as rapidly as conditions permit. 
Members are allowed to exercise such controls as are 
necessary to regulate international capital movements. They 
may also impose restrictions on exchange transactions with 
non-members unless such restrictions are contrary to the 
purposes of the Fund. 
Operations of the Fund- 
In entering into transactions with the Fund, each member 
will act through its Treasury, central bank, stabilization 
fund or other similar agency. The Fund will sell the cur- 
rency of a member country in exchange for another member 
currency or gold, subject however, to certain specified con- 
ditions which may be waived in particular cases. Of these 
conditions, the first relates to scarce currencies. In this case, 
i.e., when the Fund's holdings of a currency become scarce.the 
Fund will make a formal declaration to that effect and pro- 
ceed to apportion the supply of scarce currency according to 
the relative needs of members. The second condition is that 
the Fund's holdings of the purchasing member's currency 
should not exceed two hundered per cent of its quota nor 
increase by more than twenty-five per cent of its quota 
during the period of twelve months preceding the date of 
purchase. The third condition is that the resources of the 
Fund should not be used in a member country to the 
purposes of the Fund. 

Any member may purchase the currency of another 
member by the sale of gold to the Fund. It may also re- 
purchase by tendering the gold to Fund any part of the 
Fund's holdings of its own currency in excess of its quota. 
At the end of each financial year of the Fund, a member 
will use a specified part of its monetary reserves to re- 
purchase from the Fund the Fund's holdings of its own 


The Fund will levy a graduated and steadily ^increasing 
charge on the average daily balances of a member's currency 
when these exceed the quota. All charges will generally be 
payable in gold. 

The resources of the Fund will not be allowed to be 
used for meeting a large or sustained- outflow of capital. 
Capital transactions of a reasonable amount will, however, 
be allowed when they are for ordinary commercial purposes 
or are met out of a member's own resources of gold and 
foreign exchange. 

In the event of a general scarcity" of a particular cur- 
rency arising, the Fund will inform the members and issue a 
report on the causes of scarcity and the measures necessary 
to that end. It will also take steps to replenish its holdings 
of that currency by raising a loan in that currency or by pur- 
chasing the currency in exchange for goM. 

Arrangements during the Transitional Period 

During the post-war transitional period, members mny 
maintain and adapt to changing circumstances restrictions 
on payments and transfers for current international transac- 
tions but they will withdraw them as soon as this balance 
of payments gets properly adjusted. Within three 3 r ears of 
the commencement of its operations, the Fund will report 
on restrictions still in force and five years after the com- 
mencement of operations, any member still -retaining any 
restrictions will consult the Fund as to their further reten- 
tion. The Fund may also represent to any member that 
conditions are favourable for the withdrawal of any parti- 
cular restriction or for the general abandonment of restric- 
tions. If it finds that any member persists in maintaining 
restrictions which are inconsistent with its purposes, it may 
declare such member ineligible to use the resources of the 

2. The International Bank for Reconstruction and 

The Agreement to bring the International Bank for Re- 
construction and Development into existence will come into 


force when governments with minimum subscriptions of 
not less than 65 per cent of the total subscriptions decide 
to come in but in no event before May 1, 1945. 

Objectives and purposes. 

The purposes of the Bank are to assist in the reconstruc- 
tion and development of the territories of members by 
facilitating investment of capital for productive purposes, to 
promote private foreign investment by means of guarantees 
or participation in loans and other private investments, to 
supplement private investment by providing finance out of 
its own resources, to promote the long range balanced 
growth of international trade by encouraging international 
investment for the development of the productive resources 
of members, and to assist in the immediate post-war years 
in effecting a smooth transition from a war-time to a 
peacetime economy. 

Membership, Capital and Management. 

The original members of the Bank will be those members 
of the International Monetary Fund which accept member- 
ship before December 31, 1945. Other members ot the 
Fund will be admitted to membership on such terms' as the 
Bank may prescribe- Any member may withdraw from the 
Bank by giving a notice in writing and a member who fails 
to fulfil its obligations may be suspended. A member who 
ceases to be a member of the International Monetary Fund 
will (unless retained by three-fourth majority vote) automa- 
tically cease after three months to be a member of the 

The authorized capital stock of the Bank will be 
$10,000,000,000, divided into 100,000 shares of $100,000 
each which will be available for subscription only by 
members. The capital stock can be increased by three- 
fourths majority vote. The subscriptions prescribed for the 
original members vary from 3175 million dollars in the 
case of the United States to '2 million dollars for Paraguay 
and the six countries with the largest subscriptions come 
in the following order : U.S.A. (3175), U.K. (1300), U.S.S.R. 


(1200), china (600) France (450) and India (400). Twenty 
per cent of the subscription of a member will be paid and 
the remaining eighty per cent will be subject to call by 
the Bank. Of the paid up capital, two per cent will be 
payable in gold or United States dollars and the remaining 
eighteen per cent in the currency of the member. The 
capital subject to call may be paid either in gold, United 
States dollars or in the currency required for the purpose 
for whLh call is made. Shares of the Bank will have to be 
kept unencumbered by the Bank and will be transferable 
only to the Bank. 

The management of the Bank will vest in a Board of 
Governors, Executive Directors, a President and staff. The 
Board of Governors which will have all the powers of the 
Bank will consist of one governor and one alternate 
appointed by each member. Except in specified cases, the 
decisions of the Bank will be taken by a majority vote. The 
Executive Directors to whom powers will be delegated by 
the Board will conduct the general operations of the Bank. 
Of the twelve Directors, five will be appointed, one by each 
of the five members having the largest number of shares 
and seven will be elected. The President who is not to be 
a Governor or an Executive Director or an alternate will 
be selected by the Executive Directors and will be the 
chairman of the Directors with no right to vote except in 
case of an equal division. He will conduct under the 
direction of the Executive Directors the ordinary business 
of the Bank and in appointing the staff will pay due regard 

to the importance of recruiting personnel on as wide a 
geographical basis as possible. 

An Advisory Council of not less then seven persons 
selected by the Board of Governors including representatives 
of banking, commercial, industrial, labour and agricultural 
interests will be set up to advise the Bank on matters of 
general policy. There will also be appointed Loan Commi- 
ttees to study and report to the Bank on the suitability of 
particular projects for purposes of loans. 


Loans and guarantees 

The Bank may guarantee, participate in or make loans 
to any member, to any political sub-division of a member 
and to any business, industrail and agricultural enterprise in 
the territories of a member. Loans made or guarantee will 
be for the purposes of specific project of reconstruction or 
development. The Bank will satisfy itself that the 
borrower is unable to obtain the loan in the market at 
reasonable conditions and that the borrower or the 
guarantor will be in a position to meet its obligations under 
the loan. It will also make arrangements to ensure that 
the proceeds of any loan are used only for the purposes for 
which the loan was granted. In determining the conditions 
and terms of loans made to those members whose metropo- 
litan territories have suffered great devastation from enemy 
occupation or hostilities, the Bank will pay special regard to 
lightening the financial burden and expediting the comple- 
tion ol such restoration and reconstruction. 
Operations of the Bank, 

The Bank will make or facilitate loans of three kinds : 
(1) direct loans out of its own funds (2) direct loans out of 
funds raised in the market of a member or otherwise 
borrowed by the Bank and (3) wholly or partly guaranteed 
loans made by private investors through the usual invest- 
ment channels. Free-est possible conversion of currencies 
into one another will be ensured for purposes of loans and 
in ths case of direct loans-i.e., category (1) and (2) above- 
made by the Bank, it will furnish, to the extent possible, the 

borrower with such currencies as are required for expendi- 
tures in connection with the loan. The terms and conditions 
of interest and amortization payments, maturity and dates 
of payment or direct loans will be determined by the Bank. 
In the case of guaranteed loans, the Bank will charge a 
guarantee commission at a rate which the Bank will 
determine and which during the first ten years of the Bank's 
operations will not be less than one per cent per annum or 
more than one and a half per cent per annum. 


The amount of commission received by the Bank in 
respect of direct and guaranteed loans will be set aside as 
a special reserve which will be used to meet the liabilities of 
the Bank in cases of default on loans. The reserve will 
furnish the first line of defence in cases of default ; other 
reserves, the surplus and the unpaid capital will provide the 

The Bank will have the power to buy and sell securities 
which it has issued or guaranteed or invested in, to 
guarantee securities in which it has invested, to borrow the 
currency of any member with the approval of that member 
and to buy and sell other suitable securities in order to 
secure investment and sell other suitable securities in order 
to secure investment of the special reserve accumulated out 
of commissions. 

In their decisions, the Bank and its officers will be 
guided only by economic considerations. They will not be 
influenced by the political character of the members nor 
will they interfere in the political affairs of any member. 
3. An examination of the Agreements. 

The Bretton Woods Agreements have the most un- 
exceptionable objective of providing both an international 
code of monetary conduct and the machinery for consulation 
and adjustment of monetary relations among nations- They 
not only offer a way out of the chaos created by the norrow 
autarchistic policies which the nations adopted especially 
during and after the Great Depression of 1929 33 but 
provide something of a substitute for the gold standard 
which was found so unworkable in the inter-way years. 
Unless the nations wish to revert to the utterly unsatis- 
factory arrangements instituted during the thirties, they 
must accept an essential international framework of the 
type embodied in the Agreements. A measure of monetary 
integration on the international scale is the only alternative 
to complete monetary disintegration. 

In the present temper of nations, even the ensuring of 
a certain guaranteed minimum of international monetary 
co-operation will be a definite achievement For there is a 
str ong disposition to view every act of international co- 
operation primarily from a national angle and to beat a 


hasty retreat from all international commitments which 
seem to restrict unduly the area of national freedom. Each 
nation wishes to retain for itself a large elbow-r oom for its 
domestic economic and financial policies. The Agreement 
relating to the International Monetary Fund has given due 
recognition to this fact by attempting a compromise 
between international co-operation and national freedom of 
action. While on the one hand, it permits the enjoyment 
of benefits of the Fund only to those members who accept 
certain obligations including the obligation of consulting 
the Fund and abiding by its decisions, it also allows them 
considerable latitude in the matter of fixation of initial par 
value of currency, exchange variation, exchange restrictions 
and pursuit of domestic, social or political policies. 

The functions and spheres of the International Monet- 
ary Fund and of the International Bank for Reconstruction 
and Development are distinct but complementary. While 
the Fund will help the nations in tiding over temporary 
deficits in the balance of payments by extending to them 
short-term credits, the Bank will assist in the more per- 
manent tasks of reconstruction and longrange development 
by granting or assisting in raising longterm credits. The 
Fund will, by ensuring stability of exchanges and abandon- 
ment? of restrictive exchange practices, help in opening up 
the channels of international investment and the Bank will 
by stimulating the economic development of nations and the 
expansion of international trade reduce the necessity of 
short-term credits. It is worth noticing that no nation can 
utilize the machinery of the Bank unless it accepts the 
membership of the Fund. 

In respect of management, both the Fund and the Bank 
ensure a strong representation for five countries, viz.. United 
States, United Kingdom, U.S.S.R. France and China* 
These countries have been allotted the biggest quotas and 
the quota of a member in both the Fund and the Bank 
determines not only the voting rights and share in manage- 
ment but also the extent to which it will be able to draw 
upon the resources of the two institutions. The prominent 


position assigned to the bigger countries does not prejudice 
the chances of smooth working of the Fund or the Bank 
but it will certainly call for the highest degree of impartiality 
and fairness on the part of the management. The two 
institutions will be judged by their actual working and if 
they fail to inspire the confidence of smaller nations, they 
will fall in their main objective of making a contribution to 
the task of international monetary and financial collabora- 

In discussion on the Fund, the important point has been 
raised whether the monetary system embodied in the Fund 
is not after all a slightly modified version of the gold standard 
and whether it will not be on that account beset with the 
' same kind of dangers and pitfalls. 1 Now there is no doubt that 
the Fund does give a place to gold as such, firstly, by layirg 
down that a part of the subscription of a nation must be 
made in gold ; secondly, by ensuring convertibility of a 
currency into gold and vice versa and, thirdly, by prescribing 
that the par value of currencies will be expressed in terms 
of the United States dollar and transactions in gold will be 
made at a price which differs from the par value by a certain 
prescribed margin. Gold has not been thrown overboard ; 
in fact, considering the interest that all the three big powers, 
viz J U. S. A., U,S.S.R. and United Kingdom have either as 
stockists or producers of gold, it would have been too much 
to except that it would be. But it is far from the truth to 
say that the Fund pushes out gold standard from the front 
door and brings it back from the backdoor. There is no- 
thing of the essential mechanism of gold standard incor- 
porated in the constitution of the Fund- There is, for 
example, no stipulation or implicit understanding that each 
country will provide convertibility of its currency into gold 
or regulate the volume of internal currency or credit in 
some proportion to the amount its gold reserves- Exports 
and imports of gold will not, therefore, have the same 

i See part iculary The Banker (Sept. to Nov., 1945). Also Econoca 
(November, 1944). 


significance as they had under the gold standard. An adverse 
balance of payments will be met by a nation not by the 
adoption of deflationary policy at home but by seeking 
temporary accommodation from the Fund. Moreover, 
under gold standard the volume and the rate of growth of 
gold production in the world impinged directly on commer- 
cial and economic activity by regulating the volume of 
currency and credit so much so that some writers have 
cited the failure of gold production to keep pace with trade 
as an important cause of the Great Depression of the late 
twentiesbut the Fund on the other hand, by providing for 
uniform changes in the par values in effect gold values 
of all currencies weakens the link between gold and the 
values of currencies. If the Fund, at all, restores the gold 
standard standard, it is a very flexible type of gold 
standard sans mechanism, sans rigidity, sans dominance- 

The Fund excludes from its purview international in- 
debtedness arising out of the war. The liquidation of large 
war balances built up in foreign currencies, particularly 
sterling will, therefore, have to be dealt with by bilateral 
negotiation between the countries concerned. This will 
obviously militate against the multilateral flow of trade 
which the Fund is actually intended to promote- At the 
same time it is difficult to see how the Fund with its limited 
resources of $8800 millon can undertake - the unlimited 
obligation of converting balances of very much bigger 
magnitude, via m?dia could perhaps be found by making a 
provision in the Fund for the multilateral conversion of 
portion of the balances but even this was not acceptable 
to the vast majority of the nation participating in the 
Bretton Woods Conference. This exclusion of war balances 
from the scope of Fund has naturally caused the greatest 
disappointment and dissatisiiction in countries like India 
which have accumulated large balances abroad- 

X Period 


It was Edmund Burke who said that war never leaves 
a nation where it found it and a careful student of the 
economic, especially the monetary, situation in India before 
and soon after the war will not have the slightest difficulty 
in testifying to the truth of that observation. Between 
August 1939 and August 1945, the currency arrangements in 
India had *been altered so radically in several essential 
respects as to be almost beyond recognition. The war had 
bequeathed to the country an inflated structure of currency 
and prices, an intensive and complicated system of exchange 
control, a large volume of accumulated sterling balances, 
membership of the Empire Dollar Pool and a system of 
coinage materially different in composition from the pre- 
war system- And though it had preserved intact the 
rupee-sterling link and the Ls. 6d. ratio, it had furnished 
through the Bretton Woods agreements a window from 
which India could look out from her narrow pocket and 
scan new horizons of her monetary destiny. The over-all 
picture of currency situation in India on the morrow of war 
was thus one of baffling problems and intense anxiety for 
the immediate present and of easing strain and brighter 
outlook for the future. 

It is somewhat melancholy to reflect that there is so 
little in common between the post-war world that people 
talked about and dreamt of a few years back and the world 
as it is and perhaps for sometime is going to be. In all 
serious discussion on post-war economic problems, one 
word which occurred a little more frequently than others 


was 'transition'. It stood for the stage that would 
inevitably follow the end of hostilities and precede the 
establishment of 'normalcy' (whatever that might mean). 
It carried with it some associations of hope and comfort, 
for transition was looked upon by many persons as a kind of 
bridge, so to speak, by which a war-worn and war-weary 
world would cross over to the safety and happiness of an 
established peace. The actual experience was much less 
pleasant than the dream. More than 4 years have passed 
since the end of hostilities with Japan and there are yet no 
signs visible on the horizon of a definite advance towards 
those arrangements which will bring about economic 
stability and progress for the world- We do not seem to 
have entered the transitional stage at all and are witnessing 
just the aftermath of war. 


In any appraisal of the situation in India as it Developed 
after the war, it will be better to begin with the study of 
economic conditions of the countries abroad. ,The war 
had left agriculture and industry of the European countries 
completely devastated and the recovery in these countries, 
despite the Marshall Aid from the United States of America, 
was painfully slow. Recovery was rendered all the more 
difficult by the emergence of two distinct political blocs 
in the world. The countries of Eastern Europe under the 
influence of U.S.S.R. refused to co-operate with the 
countries of Western Europe who, under the inspiration 
of the United States of America joined together in a 
Union of Western Europe, drew up a programme of 
recovery and submitted a report to the Government of the 
United States of America giving details of their require- 
ments of American aid for rehabilitating their economies 
and closing their trade gap for the period between 1948 
and 1951. The whole programme of European recovery 
envisaged an aid of $17 billions to the 16 European nations 
and a grant of $ 5*3 billions was authorized by the United 
States Congress on 2nd April, 1948 for the year ending 31st 
March, 1949. The Marshall Aid is scheduled to come to 
an end by 1951, but recovery in Europe as indeed in many 
other countries, like India is so slow that it is difficult to 
imagine that even by that year, the world will return to 
normal conditions. 

One of the greatest problems of the world after the war 
has been inflation. The soaring price level coupled with 


rising costs without a proportionate increase in production 
is still the most important economic problem of many 
countries in the world. The index number of wholesale 
prices in the United States of America which stood at 123 
in 1945, rose sharply to 140 in 1946, 176 in 1947, 191 in 1948 
and was at 184 in March 1949. In the United Kingdom also 
the rise waslcontinuous from 155 in 1945 to 161 in 1946, 176 
in 1947, 202 in 1948 and 203 in March, 1949. In Canada the 
index jumped up from 122 at the end of the war to 181 in 
1948 and 187 in 1949. One of the worst sufferers was France 
where the price index rose from 421 in 1945 to 1920 in 1948 
and 2100 in March, 1949. The worst year in the matter of 
inflation in the case of all these countries was 1948. 

Although the basic cause of inflation all the world over 
was the excess of effective demand over the available 
supply of goods and services, the pattern as well as the 
extent of inflation varied from country to country in 
accordance with the impact of national and international 
forces operating in each. In the United States for example, 
the rise in the general price level was due to great demand 
for her goods both in the country as well as abroad, 
expansion of bank credit, speculative activity in the country 
and rise in wages. In the United Kingdom, increased 
costs of production including increased prices of coal and 
enhanced freight rates, reduction in imports with a view 
to closing the adverse balance of payments and large 
capital investments made by the government contributed 
to the inflationary pressure on prices. In countries of 
Western Europe, deficit budgets, acute shortage of 
consumers goods, political instability, unstable financial 
position, heavy adverse balance of payments and shortage 
of raw materials helped in the persistence of inflationary 

Some decrease was marked in the value of notes in 
circulation in some important countries like Australia, 
United States and United Kingdom in the latter part of 
1947 but on the whole the amount of notes in circulation 



has been very high as will be shown by the following 
table : 


End of 

End of 

United Kingdom 1380 1422 

Australia A 
Canada $ C 
Newzealand NZ 
United States $ 
France Fr 

200 207 

992 1031 

46'2 502 

272* 27'6 

570* 722* 

End of 


In Millions 
Increase (+) 
or decrease(-) 

over 1946- 



Thus apart from the deficit finance and other con- 
tributory causes mentioned above, the excessive supply 
of money continued to exert its pressure on the price level. 
Contrary to all expectations, prices did not fall and the 
world continues to experience one of the worst periods of 
inflation ever recorded in history. 

But inflation is not the only headache of the world at 
the present time. There is a serious disequilibrium in 
the world trade relations. Countries of Europe, United 
Kingdom and other countries in the sterling area have 
found it impossible to balance their balance of payment 
accounts particularly with the United States. There 
developed in 1947 a "dollar crisis" which for the time being 
was resolved in the case of Great Britain and countries oi 
the Western Europe by E.R.P- aid from the United States. 
But the economies of these countries have failed to stage 
sufficient recovery and the aid that is being received by them 
from America has not proved enough to bridge the gap 
between imports and exports- These countries have been 
losing heavily their gold and dollar reserves in order to 
square their International account- Taking sterling area 
only, the gold and dollar reserves of this area at the end 
of March 1948 when the Marshall Aid plan was set in motion 
was 552 millions. They fell to 406 millions in June 
1949. The net deficit of Great Britain on dollar account 

*In 1000 millions 


was 226, 1024 and 423 millions respectively in 1946, 
1947 and 1948. In the first half of 1949 the deficit was 
239 millions. In the beginning of 1949, suggestions began 
to appear in the press that the Pound sterling will have 
to be devalued in order to encourage exports and discourage 
imports. The British Chancellor of Exchequer repudiated 
categorically the reports that the British Government had 
any intention to devalue the pound. But this declaration 
has not been taken seriously by any one and such leading 
journals as the London "Economist" have suggested that 
despite hei best efforts, Britain will not be able to maintain 
the present value of the pound.* The fact of the matter 
is that while the world continues to suffer from shortag es 
of consumers goods, machinery and raw materials, prices 
in the United States have shown a downward trend in the 
last few months. On the other hand on account of the 
existence of inflationary conditions in other countries, 
prices and costs have remained high. At present the prices 
of British manufactures are much higher than those of 
American goods with the result that the British goods are 
being priced out of the American market- The productive 
efficiency of the United States in almost all lines today 
stands much higher than that in any other country of the 
world- While the productive efficiency in other countries 
remains lower, their costs remain inflated on account of 
high wages, deficit budgets and shortage of raw materials 
and machinery. The United Kingdom as also Western 
European and sterling area countries are trying to meet the 
present shortage of dollars by cutting down drastically 
their imports from dollar area and increasing their exports 
to it. But this will accentuate inflationary conditions still 
further. Another suggestion that is being put forward is a 
general devaluation of currencies vis-a-vis dollar in order 
to encourage exports to dollar areas and discourage imports. 
But this step will be of dubious value for achieving the 
objectives in view. At present a conference is being held 
at Washington to evolve a plan to resolve the "dollar 
crisis" of the sterling area. The conference may result in 
further cuts in imports from the United States by these 
countries and in an increased aid from America to these 
countries. Devaluation of pound may also be agreed*. 
But these steps will not restore the equilibrium nor will 
they resolve the crisis. What is needed is an increase in 
productivity in these countries and reduction in costs in 
* Pound was devalued on 18th September, 1949. 


order to enable the goods of these countries to compete 
freely with the American goods. On the American side, 
it must be clearly understood that America must discharge 
the obligations of international creditor more efficiently. 
At a time when it is striving for restoration of multilateral 
trade and when her productive efficiency stands highest in 
the world, it does not behave her to continue with high 
tariff walls against foreign goods nor can the measures like 
subsidized shipping be justified on any ground today. 
United States Government has failed to realize the im- 
mense change that has taken place as the result of the 
war in the position of that country. It has refused to see 
the logic of events and so long as it keeps up its present 
attitude, the dollar will remain a permanent problem- 

There is only one way to resolve the present difficul* 
ties of the world World must be made safe for peace. 
The political squabbles between the pqwer blocs must 
stop and expenditure on defence and armament must be 
ruthlessly cut down. Retrenchment in public expenditure 
at home, reduction in cost, increased production and 
additional financial aid from America to the war-devastated 
as well as economically undeveloped countries are the 
measures which are necessary to restore the world to its 
economic health. But chances of these steps being taken 
are remote. Conditions may not improve for a long time 
to come. 


Although India did not become a theatre of war and 
Indian agriculture and industry escaped devastation at 
the hands of enemy, the economic activity in this country 
has shown the same trends that have been observed in 
the countries directly affected by the war. Rising prices, 
mounting costs, budget deficits and trade gaps are the 
most outstanding problems of the country at the present 

There was a general depression psychology in the 
country at the end of the hostilities in the East in August 
1945. It was believed that with the cessation of hostilities 
the inflationary pressure would come to an end. There 
would be no need to issue any more currency to finance 
:he war and the budgets would be balanced. With the 
decrease in defence and other public expenditure, and 
without a corresponding increase in the private expenditure, 


the total outlay on goods and services would decrease. This 
would be an important deflationary force. It was assumed 
that prices of food and other agricultural commodities had 
reached their peak and with normal agricultural production, 
these prices would fall, As agricultural prices are the 
basic factor in price level in India, there would be a general 
fall in prices: The continuance of controls was assumed 
and but for few economists in the country, none thought 
of the possibility of a post-war inflation. Budget proposals 
were framed in 1946 with a view to avoiding deflation and 
making transition from war to peace smooth. Thus 
introducing the budget, Sir Archibald Rowland said, 
"In one important respect, however the situation in India 
resulting from the cessation of hostilities differs from that 
in other important belligerent countries such as United 
States of America. In largely agricultural countries such 
as India, and the Middle Eastern States, war expenditure 
though in absolute amounts much less than in the indus- 
trialized states df the West had had a proportionately 
greater effect in stimulating the growth of national income. 
It follows therefore that with the fall in war expenditure 
which is now inevitable, a greater proportionate effort 
will have to be made if the national income is not to fall 
below its war level. In other words deflationary tendencies 
will in the event of countervailing measures begin to 
manifest themselves before long. " In actual practice 
however, events turned out to oe different from what had 
been expected- There was a good deal of repressed infla- 
tion in the country which burst out into an open inflation 
as soon as war time controls came to be relaxed. The 
process of reconversion in India as in other countries was 
much easier than it had been thought it would he. The 
fall in public expenditure, the decrease in demand of stores 
for defence forces and demobilization had no perceptible 
effect on the price level or the level of employment in the 
country. Shortage of labour continued to be felt inspite 
of demobilization and no difficulty was encountered in the 
re-employment of personnel released from the army. During 
the war, the industrial and agricultural labour had not 
been able to increase its wages in proportion to the rise 
in prices. After the war, there was a wave of strikes and 
good deal of industrial unrest. The industrial labour got 
the belated relief after the war and wages showed a constant 
tendency to rise- Agricultural labour was also much better 
off after the war than it was during the war. The govern- 


ment employees also got several upward revisions of their 
salaries in the form of enhanced clearness allowances, etc. 
The impact of the rise in wages in the government offices 
was felt in private offices as well. The alround rise in 
wages and scarcity of labour in the country as also the 
peculiar difficulties arising out of the partition of the 
country resulted in an unprecedented rise of prices which 
created a good deal of discontent in the country ^ 


When the war came to an end in August 1945, the 
wholesale prices index issued by the offica of the Economic 
Adviser stood at 244 1- It i\)se stea.lily to 289'6 in 
November 1946 For a year, till NTovembjr 1947, 
price level was more or less stable, the index moving 
within the narrow range of 28 J'6 and 299'3. In 
November 1947, prices began their upward trend once 
again ind the index nu nbar shot up to 31T6 in December 
1947, 333'4 in Jinuiry 1948, 341'8 in February and 343*6 
in March 1948. The rise ia prices did not stop even there 
and in August 1948 the index rose to 383- The government 
announced its anti-inflationary measures in October 1948 
and it was expected that prices would come down but ;i 
year after in September 1949 price index is still at 3883. 
Prices have been stabilized bat they have not been 
brought down- As a matter of fact, they are showing a 
tendency to rise again as the index number after go ng 
down to 370 has come up to 388 again. The greatiest 
increase has taken place in the case of agricultural 
commodities, where the index rose from 264 2 in September 
1945 to 351-8 in August 1947 and 402'4 in March 1948. 
Another item which has shown a great increase in prices is 
the industrial raw materials. Prices of manufactured goods 
have not risen as high as the prices of agricultural 
commodities and raw materials- Several causes have 
contributed to this rise of prices. Expansion of currency, 
deficit budgets, decontrol, fall of production and critical 
food situation in the country are some of the most 
important among them. 

Expansion of Currency 

The process of financing H. M. G. purchases in India 
by the issue of paper currency against sterling acquired in 
London continued for some time even after the war. 



The total note issue increased from Rs. 1154 Crores on 
31st December 1945 to Rs. 1248 Crores m January 1946 
and Rs. 1254 crores in .June 1946. The notes in circulation 
similarly showed an increase from Rs. 1141'84 crores in 
September 1945 to 1237*84 crores in June 1946. The 
following table gives the increase in the currency upto 
August 1947. 


(Figures relate to the last Friday of every month) 

Total notes Notes in Sterling Securities 
Issue Circulation with Reserve Bank 
September 1945 116274 1141-84 104233 






















































The table shows that there was no addition to the 
amount of sterling securities with the Reserve Bank after 
June 1946 which means that so far as inflationary process 
for financing H, M- G. expenditure in India was concerned, 
it came to an end in that month. Thereafter inflation 
was resorted to finance the deficit of the Indian Govern- 



merit This deficit became pronounced after August 1947 
on account of the partition, refugees relief? War in 
Kashmir, and Police Action in Hyderabad. The note issue 
reached the high. water mark of Rs. 1,31.668 in March 1948 
and the notes in circulation rose to Rs. 1303*78 crores. 
Thus it was th^ deficit of the British Government which 
gave rise to inflation in India during the war and for one 
year after the war. It was our own deficit which was 
financed by the issue of additional paper currency after 
that. The method remained the same. The object was 
different. In their second Manifesto* issued in the first 
week of Fabruary 1946 the Indian Economist warned the 
Government that by continuing to finance the purchases 
of His Majesty's Government of India by the same 
inflationary procedure as during the war, the Government 
of India is driving Indian economy almost to the brink of 
disaster". The protest had its effect and financing of His 
Majest3^'s Government purchases in India was stopped 
three months after. But the dangers of expansion of paper 
currency were not realized and by financing their own 
deficits by the inflationary procedure, the Government of 
India already seems to have driven the economy of the 
country to the brink of disaster, 

Deficit Budgets. 

Despite the sharp fall in the defence expenditure in 

the Central Government and civil security expenditure in 

the provinces, the budgets of both Central and Provincial 
Governments remained grossly unbalanced. 

The following table shows the dificit from year to 
year both in the Central and Provincial budgets after 
the war. 


1945-46 1946-47 1947-48 1948-49 1949-50 

(Revised) (Revised) (Revised) (Budget) 

Revenue 360.67 336.19 178.77 338.32 322.98 

Expenditure 484.57 381.48 185.29 339.87 322.53 
Deficit 123.90 45,29 6.52 1.55 

*See Appendix B. 
Figures are for the period, 

15-8-47 to 31-3-48 



All Provinces 

(*) (t) a> 

1946-47 1947-48 1948-49 1949-50 
(Accounts) (Revised) (Budgets) (Budgets) 

16978 207*04 24277 254'83 
16217 211-08 25827 26415 

Surplus (+) 
or Deficit ( ) 

+7'61 4'04 

15-50 9'32 

The budget estimates for 1949-50 for the Central 
Government disclosed a small surplus of Rs. 45 Lakhs after 
a series of deficit budgets- But this surplus is not going to be 
realized in actual practice. On the other hand in the 
revised estimate a deficit as big as Rs. 30 crores may be 
disclosed. Moreover the above figures do not take into 
account the deficit on the capital account. The capital 
budget for the interim period of 1947-48 disclosed a deficit 
ofRs. 13434 crores. In 1948-49, the deficit on this 
account was budgeted at Rs. 112*50 crores and for 1949 50 
at Rs. 134 crores. The same trend was visible in the 
provinces. Except for 1947-48, the provincial budgets 
showed deficit from year to year. And even in 1947-48, 
if we include the figures of East Punjab and West Punjab, 
the two big deficit provinces, the surplus of Rs. 7*61 crores 
would be turned into a net deficit. The tension existing 
between India and Pakistan kept the defence expenditure 
high which stood at Rs. 155*43 crores in the revised 
estimates for 1948-49 as compared with Rs. 240 crores for 
the undivided India in 1946-47. If we add the expenditure 
incurred by Pakistan on defence in 1948-49, we will find 
that the total expenditure of the two dominions on this 
head was as high in 1948-49 as in 1946-47. So long as the 
relations between the two dominions remain what they 
are, expenditure under this head cannot be reduced. 
But it is not only military expenditure that is responsible 
for the deficit* Civil expenditure has shown a tendency 
to rise beyond all proportions. In 1945-46 for the undivided 
India, total civil expenditure was Rs. 124*34 crores. For 

*, Excludes figures for East Punjab and West Bengal. 
j*. Includes figures of Budget estimates of West Bengalf 

, Excludes Assam. 


the Indian Dominion only the revised estimates for 1948-49 
put the civil expenditure at Rs. 184"44 crores. The increase 
was caused by food subsidies, refugee relief and increased 
expenditure on civil administration. In the provinces, 
development plans, security services and civil administrations 
were mainly responsible for the increased expenditure. 
The increase in public expenditure and consequent budget 
deficits without any increase in the production in the 
country contributed a good deal to the rise of prices after 
the war and particularly after the partition. Formerly 
the budget deficits were financed by expansion of paper 
currency. The government has now turned to balances 
with Reserve Bank- The balances which stood at Rs. 236 
crores on 1st April 1949 came down to Rs- 105*75 crores on 
19th August 1949 a decline of Rs. 131 crores in a period 
of four months. 


Another factor that contributed to the inflationary 
crisis in India in the post-war period was the policy of 
decontrol adopted in December 1947 by the Government 
of India on the recommendation of Food Grain Policy 
Committee. It was contended that controls were creat- 
ing artificial scarcity in the country and once they go, 
goods will appear on the market which will automatically 
bring down prices. Mahatama Gandhi advocated decontrol 
of food grains, Sugar and Cloth on the ground that controls 
breed immorality, black markets and corruption- Many 
people* opposed the policy of decontrol but the Govern- 
ment unmindfuil of the consequences announced the 
decontrol of food grains on 10th December 1947. Sugar 
had alread} r been decontrolled- Cloth did not take 
long to be decontrolled- The immediate effect of this 
policy was a great spurt in prices. The index number 
of wholesale prices as has been shown above rose from 
290 in November 1947 to 311*6 in December 19*7 and 
383 in August 1948. The policy of decontrol having 
failed, the Government reverted to a policy of control in 
October 1948. Prices have been held stable since then, 
but the present conditions once again make for further 
rise unless appropriate steps are taken to check it. 
Fall in Production. 

Goods continued to be in short supply even after the 
war when there was an alround increase in demand on 

* Cf . Pt. Kunzru's speech in the Parliament on 10th Decemher 1947 


account of the desire on the part of the consumers to 
satisfy the wants they had postponed during the war. As 
against this increased demand, the production in the country 
both in the agricultural and the industrial field began to 
fall due to variety of causes. Thus the Eastern Economist's 
index number of industrial production which stood at 
126' 8 in 1943-44 fell to 105 in 1946-47 and 1053 in 1947-48. 
There was an improvement of 8 points in 1948-49 but 
welcome as this improvement is, it still falls much short of 
the requirements of the case. In agricultural production, 
things have been even worse. The production index, 
(taking 1936-37 to 1937-38 average production as the base 
-=100,) declined to 94 in 1945-46 and was at 96 and 97 
respectively in 1946-47 and 1947-48. 

The fall in industrial production was attributed to the 
undefined attitude of the government in the matter of 
nationalization of industry, non-availability and slow rate 
of renewals of the industrial plant, increased wages, labour 
troubles, high level of taxation and difficulties of obtaining 
industrial raw materials. The government has consistently 
followed a policy of encouraging industrial production in 
the last two years but the results have been none too 

Critical Food Situation. 

An important factor which contributed greately to the 
post-war inflationary conditions in India was the critical 
food situation in India which particularly became grave 
after the partition. 

In 1946 rains failed in large parts of the Punjab, Madras 
and Bombay. In all a shortage of 6 million tons of food 
grains was announced by the government greatest pressure 
was brought to bear on the Allied Food Board for the 
allotment of more food grains to India. Basic ration was 
cut down and rationing was extended to many other areas. 
In January 1947 conditions were a little better as famine 
had been avoided but they were by no means satisfactory. 
Dr. Rajendra Prasad, the then Food Member stated on 
15th January 1947, "During the past year large portions of 
our population have been on the brink of starvation. The 
situation is somewhat easier now on account of the arrival 
or expectations of arrival of the rice crop but not free from 


nxiety on account of the distance and dangers due to 
ncertainties of the weather between now and the time 
r hen the wheat and Rabi crop would be ready ". 

The situation grew worse after the partition and the 
idian dominion found itself in the grip of a chronic 
lortage of food grains. Out of the total all-India annual 
reduction of 7'9 million tons of wheat and 22 9 million 
ms of rice, Pakistan got 2 8 million tons of wheat and 
4 million tons of rice. Considering that she got only one- 
fth of the total population of India, the share of Pakistan 
i the food supplies of the country was much more than 
roportionate- In 1948 a shortage of 4 million tons was 
stimated in the Indian dominion while a total of 2'8 
lillion tons were imported at a cost of Rs. 150 crore- The 
iortage for 1949 is estimated at 4 million while for 1950 
le estimate is 3 million tons. 

The imports of foodstuffs from abroad at a heavy cost 
ot only made the balance of payment position grave but 
Dupled with the decontrol of foodgrains in India resulted 
Iso in a great rise in the price level in the country. The 
rice index of rice rose in U. F- from 338 in November 1947 
3 540 in September 1948 and that of wheat from 382 to 
69- Taking all cereals the rise was from 406 to 583. Since 
3od prices form the core of price structure in India on 
ccount of the poverty of the people, rising food prices 
levitably led to the rise in the general price level. 


The post-war inflation was different in its effects on 
he people in India than the war-time inflation. During 
he war, it was business, trading and the industrialists 
ommunity that had benefited from the rise of prices- 
'rofits increased enormously partly as a result of rise of 
rices and partly because of stoppage of imports and 
icrease in demand for the goods. Wages of industrial 
ibour rose but not to the extent of prices so that in real 
rages labour was sufferer- The agriculturists also gained 
s a result of rise in prices but the gain was not much- In 
ny way, they were just compensated for the fall in prices 
bat they had suffered during the period of depression. 
*abour as a whole gained on account of increase in 


After the war as result of general labour unrest, both 
industrial and agricultural labour was able to get: substan- 
tial increase in wages. Prices of agricultural commodities 
rose more than prices of industrial goods with the result 
that there was a substantial increase in the incomes of 
agricultural classes The increase in costs and fall in 
production brought about a decrease in industrial profits 
and in some cases there were even losses in industrial 
concerns. That explains why at a time when commodity 
prices are high, the stock Exchange quotations have been 
very low. The greatest sufferers in the post-war infla tion 
are the middle class people. The poor and rich have 
gained ; the middle class is on the verge of elimination. 
Savings in the country have disappeared. On the other 
hand there is a net dissaving. The reason is obvious. The 
middle classes who were in habit of saving have no capacity 
to save. The poor who have got additional income have 
no banking and investment habits- 


The Government became very much concerned over 
the rapid rise of prices towards the middle of 1948 and 
held hurried consultations with leading economists in 
the country, representatives of labour, trade and industry 
and its own officers. On the advise tendered by these 
representatives, the Government formulated the anti- 
inflationary policy which was announced in the first 
week of October 1948. The main features of this policy 
were a reversion to control of food grains and other 
essential commodities, bridging up the budgetary gap, 
by economizing public expenditure and increasing revenues, 
increasing agricultural and industrial production in the 
country by tax relief and other measures, encouragement 
of small savings in order to mop up the surplus purchas- 
ing power and limitation of dividends. By the limitation 
of Dividend Act, the dividends that can be declared by 
Joint Stock companies were limited to defined limits. 
Ordinarily it was not to exceed 6 per cent. Nothing was 
done to increase savings in the country and they conti- 
nued to decline- One method of encouraging saving was 
an increase in the rates of interest. It is doubtful whether 
an increase in the interest rates would have made a 
perceptible influence on the volume of savings Savings 
are low in the country because those who have the power 


to save at present do not possess banking and investment 
habits while those who have banking and investment 
habits have no capacity to save at the present* time. The 
Government rightly did noc succumb to the temptation 
of raising rates of interest* But if savings are to increase 
it will hive to approach rural classes in the country to 
get back the funds that have gone there on account of 
high agricultural prices. The Government has striven 
hard to give all conceivable help and assurances about 
future to the industrialists in order to encourage produc- 
tion in the country. A large number of tax reliefs were 
announced to the industry by the Finance Minister at 
the time of introducing the budget for 1949-50. According 
to the figures compiled by the Eastern Economist, the 
index number of industrial production rose by 8 points 
in 1948-49 over the figure for the previous year. This 
however cannot be said about agricultural production. 
The Finance Minister was also able to show, by means 
of new tax proposals, a surplus of Rs- 45 lakhs in the 
revenue budget for 1949-50 though he left a deficit of 
Rs. 134 crore uncovered in the capital budget. However 
the press reports suggest that the budgeted surplus of 
Rs. 45 lakhs will be turned into a deficit of Rs. 30 crores 
at the present rate of expenditure- The Government is 
already alarmed at the prospect and is planning to scale 
down expenditure. 

The most effective means that the Government adopt- 
ed to prevent inflation from assuming more threatening pro- 
portions was the reversion to the policy of control of food 
grains. It was announced that complete control over 
production, procurement, distribution and prices of food 
grains would be reached in October 1949. Meanwhile all 
provinces were asked to set up machinery for procurement 
and rationing. Except in Madras and Bombay, rationing 
had been completely abolished. The Government has 
reverted to it now and has been able to effect substantial 
reduction in prices of food-grains which is of the order 
of 40 to 50 percent. Thus wheat, which was selling at 
Rs. 26 to Rs. 30 per maund before the recontrol is 
being distributed through ration shop now at Rs. 15 to 
Rs. 16 in various parts of the East Punjab. 


The price level was held stable and to some extent 
even brought down as a result of the anti-inflationary 
measures. But the policy lacked vigour and efficiency 
in its execution with the result that it failed to be effective 
permanently. Inflationary tendencies once again began 
to assert themselves in July 1949 and in August 1949 the 
index rose once again to 388'3 after having fallen to 370 
as a result of anti-inflationary measures. There was the 
Sugar racket in August which resulted in a sudden jump 
of 25 per cent in the price of sugar. The government had 
to take immediate action and freeze all stocks of Sugar 
with the* factories. It did not however touch the trade 
fearing that stocks might go under-ground- The result 
is that price of sugar has not been brought down and 
the government itself has agreed to Rs. 357- per maund 
as the fair wholesale price of Sugar as compared with 
Rs. 27/8/- before the racket. The cancellation of Open 
General Licence NO. XI, XV and XVI with a view to 
resolving the balance of payment difficulties has also 
resulted in the rise in the prices of manufactured and 
imported goods. 

The situation is under control at present but it does 
not permit any complacency. The shortage of consumers 
goods continues in the country. Savings have almost 
disappeared and production in industry or agriculture* is 
not increasing. Our balance of payment position is 
critical. We are still spending huge amounts on the 
imports of foodgrains to feed our vast population. The 
government is finding it difficult to balance its budget. 
Labour and salaried classes are resisting stoutly any 
reduction in wages and salaries or any attempt at retrench- 
ment. Productivity is very low in the country. All these 
factors create anxiety about the future of Indian economy. 
The situation is full of dangerous possibilities and requires 
skilful handling on the part of the government. It appears 
that we will not be able to dispense with controls for another 
3 or 4 years and the government as wall as the people will 
have to take to austerity for a number of years to come. Our 
development plans will have to wait execution until the 
economic situation in the country improves. 


POST-WAR PERIOD (Continued). 


We have noticed in the last chapter only one develop- 
ment in the field of Indian currency after the war namely 
post-war inflation. But that is not the only or even the 
most important development. Many other changes have 
taken place. Events have moved both in India and in other 
countries with such rapidity and the working of numerous 
forces in the economic sphere has been so complex during 
the last five years that even to present a bare sketch of the 
Indian currency developments and problems requires a full 
volume to itself. It would be impossible to examine all the 
problems as they present themselves at present and to 
predict their future course within the compass of a short 
chapter. It is proposed therefore to suggest the lines along 
which their solution may be sought. 

Among the many developments and problems of Indian 
currency in the post-war period, the following stand out 
to be the most important: 

1. Sterling Balances and their releases 

2. India's membership of International Monetary Fund 

and the Bank 

3. India and Empire Dollar Pool 

4. Par value of Rupee 

5. Link with sterling 

6. Currency Policy and Price Stability 

7. Nationalization of Reserve Bank 

8. Decimal System of Coinage 

9. Demonetisation of High Denomination notes 


The manner of the disposal of sterling balances during 
the last six years aroused far too little comment at the end of 
the war compared to the question of their future utilization. 
For, substantial amounts of sterling of the value of about 
Rs. 1,600 cr ores-still awaited disposal in October 1946, though 
in the following months the pace of accumulation had con- 
siderably slowed down due to the termination of hostilities. 
The Government had already liquidated the Chatfield Debt 
of one quarter of 34 million, being India's share of the 
estimated pre-war capital cost of modernising the Indian army. 


They had also in hand a scheme for utilizing a part of the 
accumulated sterling to create a fund which might be used 
to meet their obligations on account of pensions, family 
pensions and provident funds. The remainder of the sterling 
accumulations embodying as they did the sacrifice of 
consumption of the Indian people in the past and 
representing their claim on the products of the labour of 
other people in the future was to be so liquidated that the 
structure of Indian economy received the maximum nourish 
ment and strength and the fabric of world economy sufferd- 

the least possible injury. 

Clearer visualisation of the future of these balances 
became urgent in view of the penumbra of suspicion and 
fear gathering round them. Apprehensions gained strength 
in some quarters that the perfidious Albion might, by a 
sleight, as it were, sweep all the balances out of existence. 
Several dark possibilities were hinted at. It was said, for 
instance, that the Government would just watch the balances 
being squandered away by continuing the statutory obliga- 
tion imposed on the Reserve Bank to maintain the Is. 6d- 
rate, i e., a rate which would be rendered wholly untenable 
and obsolete by the postwar relationship of British and 
Indian price levels- Another possibility indicated was the 
revision or re-interpretation of the Financial Settlement 
governing the allocation of war expenditure in such a 
manner that India found the remainder of sterling balances 
just enough to clear off the heavy debts on account of her 
share of war expenditure 1 or alternatively, India might be got 
round by wily means to make a big gift to the United King- 
dom as a token of goodwill and comradeship-in-arms. It 
was also hinted that under the post-war monetary and 
economic arrangements, plans for which were being pre- 
pared, India's sterling balances might be cleared out of the 

1 Apprehensions regarding this possibility were raised by some un- 
necessary and uniustified statements in some British papers (Qf. Economist 
7th August 1944) to the effect that India has become a creditor of Eng- 
land, not through the normal processes of trade and investments but 
through negotiated division of defence cost. India was said to have 
driven a hard bargain and the Financial Agreement was represented as 
being very liberal to India and less than {air to England. In this matter 
it is difficult to arrive at any conclusion oil economic considerations 
alone. India's capacity to pay for the defence measures undertaken by 
her may be measurable in economic terms and it is well kno^n that it 
is none too large but no one can seriously suggest that India should be 
called upon to pay to the utmost limit of her capacity except on the 
strict assumption that every defence measure for which she has to pay 
was also undertaken solely in her own interest. That assumption, how- 
ever will be widely questioned in this country. 


way as a deadweight on international trade and an obstacle 
to fruitful international economic collaboration. Only a 
little less disquieting was the suspicion that it might be 
made out that the sterling balances were inflated due to the 
high prices at which war purchases were made in India and 
that, therefore, 'water should be squeezed' out of them 1 . 
Then there was the fear that sterling might grossly depre- 
ciate bringing down the commodity return for the balances. 
Further, it was said that even if the balances remained in- 
tact and were liquidated in full, the speed at which they 
were released for realization might be very slow and the 
purposes for which they could be utilized might be severely 
restricted in practice. 

It is not difficult to detect in these speculations, not all 
of which could be brushed aside as rambling or wild, the 
shadow of the unpleasant memories of the past. There 
was the obvious reluctance to believe that a war contri- 
bution (of 100 million in the last war) and the dissipation 
of sterling resources through an ill-advised attempt to 
maintain a high exchange ratio (as in 1920) are episodes 
that belong to the dead past and cannot be repeated in 

Even if all the fears inherited from the past were not 
projected into the unknown dimensions of the future, 
ceaseless vigil was still necessary to ensure that in the rush 
of post-war adjustments the pitch was not so queered 
for India that her hard-won foreign resources were whittled 
away. Certain eventualities were to be guarded against. 
In the first place, no revision or further interpretation of 
the Financial Settlement regarding allocation of defence 
expenditure between England and India was to be permitted 
to augment India's share of the total financial burden of 
war, and it is fortunate that Britain in spite of unofficial 
suggestions did not officially ask for her. Secondly, no 
scaling down of the balances under the provisions of the 
Anglo-American Financial Agreement of 1945 was to be 
permitted. Thirdly, no post-war currency agreements which 
hampered in any way the fullest and free-est utilization 
of sterling balances were to be subscribed to. Fourthly, no 

1 This line of attack on the integrity of sterling balances was 
adopted by some of the British economic and financial journals but has 
been effectively countered by the Selected Committee on British 
Expenditure in India which has report that taking all the circum- 
stances into consideration fair prices have on the whole been secured 
for war stores and for food bought on account of His Majesty's 
Government in this country. 


financial or commercial arrangements among the victorious 
nations or between England and India were to be allowed 
to impair India's liberty to utilize her sterling resources 
to purchase such goods and in such countries as she 
decided upon in her own interest 1 . Fifthly, any loss to 
India from depreciation of sterling must be made good 
by the British Government as part of a bargain in which 
the debtor pays a commodity debt unimpaired in amount 
by a change in prices 2 - Sixthly, no relaxation of the 
control over the exchanges should be allowed until a 
suitable parity of the rupee in relation to sterling has been 
determined after taking into account the relative price 
levels and other basic facts of the economic relationships 
of the two countries. 

The sterling balances, it should be made clear, repre- 
sented neither abnormal gains made- by India out of a world- 
devastating war nor were they the outcome of any war- 
time profiteering. The whole process of war purchases in 
India and payments for them involved forced abstention 
from consumption for a large part of India's population 
and brought very little accession to their total real income. 
There is no disagreement that Indian economy was strained 
to the utmost during the war and with the depletion of 
exiguous reserves that the population possessed only in 
the best of years, shortages and scarcity were intensified. 
The liquidation of sterling balances was therefore, no 
distribution of largess but an amply deserved measure of 
economic restitution on the part of United Kingdom. In 
fact, the use of the term 'reparation' would not be in- 
appropriate but for its odious associations in this 

1 It was mainly this consideration that aroused opposition to the 
otherwise excellent suggestion made by Sir J.C Raisman in his Budget 
speech (March 1943) for the institution of a Post-war Reconstruction 
Fund. The Fund was to be constituted by setting apart a portion of the 
accumulated sterling and was to be utilized after the war to purchase 
machinery and other industrial equipment. 

a Mr. G. LX Birla suggested in this connection that sterling 
balances should be linked up with the* U. K. commodity price index 
number so that it the prices in United Kingdom rose, i.e., if sterling- 
depreciated, the amount of sterling balances should be raised proper- 
tionately. (Cf. his article on Our Sterling Balances in The Hindustan 
Times of March 27, 1943). 


The fears regarding scaling down of sterling credit or 
revision of Indo-British Financial Agreement to the detri- 
ment of India fortunately proved unfounded. England 
has stood by its pledged words and is committed to pay 
the whole amount. Already the balances standing at the 
credit of India have come down to Rs. 635 crores (Sep- 
tember 1949) as compared with Rs- 1,600 crores in October 
1946 and Rs. 1,093 crores in July 1948. We have spent 
most of this money in payment of pensions, etc- to British 
Officers in Britain, and purchase of goods and food stuffs 
from abroad, The balances have not been utilized for 
purchase of capital goods or increase in the productive 
capacity of the country. We have utilized them for meet- 
ing current deficit on trade account. 

One fear however has been realized. Sterling has 
been devalued in terms of dollar by 30*5 per cent- The 
value of our balances has been decreased by 30 per cent. 
This is a heavy loss for a poor country like India which 
she may not be able to stand easily. We have been press- 
ing in the past for an assurance from Britain that she 
would compensate us for any devaluation of pound sterling 
that she decides upon. This assurance has not been given- 
It is only in the fitness of things that England should com- 
pensate this country for a loss which has been forced 
upon us. We did not keep balances in England willingly. 
They are there because they are blocked and England has 
not found herself in a position to pay them except small 

Sterling Releases. 

On 14th August 1947 was signed in London an interine 
agreement designed to cover the period upto 31st Decem- 
ber, 1947 for release of sterling to India. Under this 
agreement the balances of Reserve Bank of India were 
to be kept in two accounts. In Account No 1 were to be 
kept the sterling released for multi-lateral convertability 
and also the currently earned amount of sterling. This was 
to be the main operative account- In Account No. 2 were 
tobe kept the remainder of the accumulated balances which 
were blocked- Under the agreement Biitain released 35 
millions to be credited to Account No. 1 for covering the 
deficit on India's balance of payment account for the period 
from 15th July to 31st December 1947. In addition to 
this amount of 35 millions, another sum of 30 millions 


was released and put in account No. 1 to cover any tem- 
porary deficit on balance of payment account- Thus for 
practical purposes the total amount released was 65 
millions. The agreement was renewed in January 1948 for 
another 6 months. 

A new agreement was signed by the Indian delegation 
which visited London for further negotiation on July 9, 
1948. Under this agreement the Government of India took 
over all the stores and installations of HUM. G. lying in 
India for a sum of 100 millions (Rs. 133 crores) paid 
out out of sterling balances in full and final payment. 
Further a sum of 147-| millions (Rs. 197 crores) was agre- 
ed to be paid by India to Britain in payment to pensions 
to British personnel who had served in India. The British 
government took up the responsibility of payment of these 
pensions beginning with a sum of 6i millions (Rs. 8 crores) 
and falling gradually to nothing in 60 years. Similarly 
another sum of 201 millions (Rs. 27 crores) was agreed 
to be paid in payment of pensions payable by provinces in 
India. The total amount thus paid out of the sterling balan- 
ces was Rs, 357 crores. On the other hand a sum of Rs. 73 
crores was credited to India on account of the liabilities 
of Britain in the defence expenditure outstanding and not 
adjusted so far. The total amount left after making all 
adjustments was 800 millions or Rs. 1,040 crores. 

England agreed to release for a period of 3 years begin- 
ning from July 1, 1948, 80 millions to be put in Account 
No. 1 in addition to a carry over of 80 millions from the 
previous unspent balances. In the first year (1948) a sum 
of 15 millions was made available for convertibility after 
which the position was to be reviewed. 

The agreement was regarded satisfactory especially in 
view of the fact that out of the previous releases of 83 
millions, 80 millions had remained unspent. This made 
India's case weak for more liberal releases. 

The Government of India, as a part of its anti-infla- 
tionary policy initiated a policy of liberal imports in 1948. 
This resulted in heavy adverse of payments and rapid 
depletion of sterling available in Account No. 1. By Janu- 
ary 1949, we had spent 43 millions more than what had 
been provided for and we asked the United kingdom for 
release of this amount. The United kingdom refused to 
do it and by April our position in respect of balance of 
payment became precarious. 


Negotiations were started again and a new agreement 
was signed between the two countries in London in July, 
1949. The terms of the agreement surpassed the most 
optimistic expectations of India. The agreement covered 
the period of next two years. Britain agreed to write 
off 81 millions drawn in the past year from Account 
No. 2 though it had been agreed that India would not draw 
any amount from this account. It provides for drawing 
of 50 millions p t er annum for each of the two years 1949- 
50 and 1950-51 when last year a limit of 40 millions was 
let for further drawings from Account No 2. India had 
agreed to draw 160 millions in 3 years. It drew that 
amount in one year only in actual practice. The agree- 
ment provides for the release of 50 millions in each of 
the two next years. The British Government also agreed 
to release sterling to cover the orders placed for foods 
by India before July, 1949. This is expected to amount to 
another 50 millions. 

The agreement was hailed as very liberal to India and 
City Editors of London papers criticized it on the ground 
of overgenerosity on the part of England to India But 
when we study the agreement in the context of devalua- 
tion of pound sterling that took place two months later, 
the generosity is easily explained. The value of sterling 
releases as also the sterling lying blocked in London to 
India's credit has been reduced by 30*5 per cent in terms 
of gold and dollars and India will be able to buy much 
less with the amount released than she could have bought 
if sterling had not been devalued 

If India does not draw more than what has been agreed 
only 360 millions will be left to the credit of India at 
the end of 1951. We have spent our balances more 
rapidly than any one expected them to be spent. And 
almost whole of the amount has been spent on financing 
the purchase of food and consumers goods which were so 
badly needed. The balances have not helped India in 
building up new industries or financing agricultural plans 
that was thought at a time to be the most important object 
for which balances might be used. Nor has the problem of 
deflation arisen in the country as a result of their use 
as was feared at one time. The country is still faced with 
the problem of inflation though we have used up huge 
part of these balances already. 



The Central Assembly in a resolution passed on the 
29th October, 1946 approved of India's continued member- 
ship of the International Monetary Fund and the 
International Bank for Reconstruction and Development. 
The whole question had been examined earlier by a 
committee of the Assembley on the Bretton Woods 
Agreements and three Interim reports had been submitted. 
In their first report dated February 26, 1946, the Committee 
expressed the view that 4 the final decision whether it would 
be to India's advantage to remain a member of the Bretton 

Woods institutions may be determined to a very consider- 
able extent by the outcome of the negotiations which His 
Majesty's Government are committed to undertake with 
the Government of India on the subject of liquidation of 
sterling credits'. If these negotiations are unduly delayed 
or are not satisfactory, it may be necessary for India to 
withdraw from the Fund and the Bank. In the second 
report presented on April 17, 1946, the Committee reiterated 
the views expressed in the first report and recommended 
that the Government of India should take advantage of 
every possible provision in the Articles (i.e. of Bretton 
Woods Agreements) to postpone payment of the 
subscriptions due to the Fund and the Bank till the last 
moment. In the third report, a majority of the Committee 
recommended that the Government should pay a portion 
of the subscription to the Bank so that India may not 
default in her obligations and a session of the Legislative 
Assembley should be called on or about November 10, 1946 
in order to allow the Assembley to make up its mind 
whether it wishes to continue India's membership of the 
Bank or whether it wishes India to withdraw from that 
institution. In a separate report, Mr. Manu Subedar, 
disagreeing with the majority, recommended that India 
should withdraw from the membership of the Bank because 
of the delay in negotiations regarding sterling balances* He 


was of the view that by joining the Bank, India would be 
called upon to undertake commitments which she would,, be 
unable to shoulder in the absence of a satisfactory solution 
of sterling credits. As for the membership of the Fund, he 
said that its position was different and some of the consi- 
derations stated by him did not apply to the Fund. 

The question of the liquidation of sterling balances got 
unnecessarily intertwined with that of India's membership 
of the Fund and the Bank. The Indian delegation at the 
Bretton Woods Conference in 1944 took up the stand that 
the liquidation of War debts should be included as among 
the legitimate duties of the Fund. 

India was represented at the conference by a delegation 
headed by Sir Jeremy Raisman, the Finance Member of the 
Government of India. 1 In presenting India's case and 
trying to secure suitable provision inserted in the Agree- 
ments, the members of the delegation acred with commen- 
dable unanimity and zeal. India's interest in the discussions 
at Bretton Woods was two-fold: as one of the United and 
Associated Nations she wished to assist in establishing a 
suitable machinery for international monetary and financial 
collaboration and as a country intent on developing her 
resources to the full, partly by utilizing her war balances, 
she wanted not only to secure a satisfactory solution of the 
problem of the liquidation of her war balances but also to 
have in the management of the Fund and the Bank a share 
which would be commensurate with her economic position 
and requirments. While, therefore, the delegation partici- 
pated in the discussions with a view to securing a general 
improvement in the proposals, their specific interest centred 
round two matters, viz. the sterling balances and the posi- 
tion in 'the executive directorate of the Fund and the Bank- 

In the matter of sterling blances, the delegation succeed- 
ed only to the extent that this subject was included in the 
agenda of the Conference. In the Conference itself, how- 
ever, they could not obtain any support for the inclusion 
of the abnormal war balances in the Fund. Not only the 
U. S. and the United Kingdom delgations but also some of 

1 It is of melancholy interest to note that this was the only delegatior 
which was not headed by a national of the country. 


the delegations of the exiled Governments of Europe stout- 
ly opposed them, In the matter of a suitable quota and 
a permanent seat on the Board of Executive Directors, 
the delegation fared little better ; for the validity of their 
claim to a permanent seat was not conceded, though the 
Indian quota was fixed at a sufficiently high figure to 
ensure a seat for India in every election- Nor were they 
successful in their effort to get a clause included to the 
effect that the development of economically backward coun- 
tries should be one of the main principles of the Fund's 
operations. They succeeded, however, in getting included 
in a modified form in the scheme of the Fund and Bank 
a minor provision that in recruiting staff for these insti- 
tutions regard should be had to geographical distribution 
consistently with efficiency 1 . 

While in the Conference the Delegation could not 
receive any recognition of their major claim, they were 
able to obtain an assurance from Lord Keynes, Chairman 
of the British delegation, that "when the end is reached 
and we can see our way into the daylight, we shall take 
it without any delay to settle honourably what was 
honourably and generously given." 

Though the Assembley decided in favour of India's 
joining the Fund and the Bank, doubts were expressed in 
some quarters whether India was not accepting too big 
a liability as compared to the advantages to be obtained. 
A.S far as the Fund is concerned, India can withdraw with- 
out any continuous liability but in regard to the Bank, a 
reserve liability of about 105 crores of rupees was to be 
accepted which was to be met on call in gold or in dollars 
or in any other currency required by the Bank. The subs- 
tantial gains to be obtained are : firstly, that India will 
have an appointed as distinct from an elected director 
and would thus have a more effective voice in the counsels 

report of the Delegation has not been published but a succinct 
and very helpful account of the proceedings is given in the joint state- 
ment of Sir R. K. S. Chetty and Mr. A, D. Shroff (Times of India, 
Bombay, August. 24, 1944) and the Bombay Rotary address of Sir 
C.D. Deshmukh (October, 1944.) 


of these institutions and, secondly that the Bank will be 
an important source for India of long term credits which 
will be multilaterally convertible into other currencies and 
thus available for purchase of machinery and capital goods 
from countries other than the United States. The work- 
ing of these institutions has already amply proved the 
wisdom and foresight of those who decided in favour of 
joining the Fund and the International Bank. A loan of 
$34 millions has already been granted by the Bank to India 
for purchase of locomotives boilers and other railway 
equipment. Another loan of $ 75 millions may be expec- 
ted for agricultural development in the near future- We 
also borrowed $ 100 millions from I. M. F. to meet current 
deficit in dollars in balance of payment account. 


The Empire Dollar Pool is realy an old arrangement, 
continued with modifications necessitiated by the war, 
under which the countries belonging to the sterling area 
settled their transactions on international account in ster- 
ling through London. Before the war sterling was freely 
convertible into other currencies and every sterling area 
country could at any time obtain through London which* 
ever currency it wanted- During the war, however, dollars 
and certain other currencies at the disposal of London be- 
came scarce due to increased payments on account of 
war requirements and reduced supply. It was, therefore, 
found necessary to institute a pool of these currencies. 
The principle of the pooling arrangement was that all 
participating countries contributed what they could accor- 
ding to their ability and each country drew from the 
pool according to its needs- Like other sterling area 
countriesi India, too, made its contributions to the pool 
and drew from it what was needed for winning the war 
or for meeting essential civil requirements. 


The position of India with respect to the Dollar Pool 
and hard currencies is given in the following table 1 ; 

(In crores of rupees). 
U.S.A. Canadian Swiss Swedish Portugese Total 

$ $ $ $ 

Accrued to 

India ... 405 40 1J 2 4| 453 

Used by 

India ... 237 83 131 2\ 2| 339 

Balance +168 -43 12 I +2 +114 

During the first four yqars of war India put more into 
the Pool than she obtained from it but from towards the 
end of 1944, the balance of trade between India and the 
United States began to turn unfavourable to India and the* 
Pool was utilized to finance the deficit- Besides the 
amounts thus used, specified sums were also earmarked for 
capital equipment required by India from non-sterling 
countries for her post-war development 

The mechanism of the Empire Dollar Pool was to be 
abolished shortly after the coming into operation of 
the Indo-British Financial Agreement which stipulated that 
the United Kingdom would abolish the Sterling Area 
Dollar Pool within one year of the coming into operation 
of that agreement and make available to each member 
country of the Sterling Area, its current sterling and dollar 
receipts at its free disposition for current transactions any 
where. This was hailed in India by some sections as a 
wise decision and satisfaction was expressed on India's 
getting out of the Empire Dollar Pool arrangement. 

This jubilation however proved to be short lived. The 
partition of the country put the Indian dominion in a more 
difficult position with regard to its earnings of dollar out 
of exports. With other countries India has also 
experienced in the last 4 years a perpetual deficit on the 
Dollar Account. India's decision to remain in the British 

i Extracted from Manu Subedar's report dated 29th July 1946, Vide 
Indian Information, Volume 19, No. 196, page 324. 


Common Wealth of Nations as a free partner made her 
association with Great Britain in the economic field as 
well inevitable. The economic difficulties of the United 
Kingdom and the "Dollar Crisis 1 ' of the Sterling Area led 
to the creation, once again of the Dollar Pool arrangements 
and India out of her free will joined these arrangements 
under the terms of Sterling Balance Agreement of 
July 1949. Under this agreement, India has been admitted 
to all rights and duties of full membership of the sterling area 
Dollar Pool. At a time when the country is in difficulties 
in getting dollars, the arrangement is to India's advantage 
but whether it would remain so in the coming years would 
depend on the economic development of the countries of 
the sterling areas and their foreign trade. 

The decision to join the Dollar Pool again has many 
implications, two of which must be clearly understood. 
The first is that while we are entitled to a share in the 
Central Dollar Pool, our fortunes are linked up with those 
of the pool. Should there be any shrinkage in the dollar 
resources of sterling area, India would be affected in the 
same way as any other country of the sterling bloc. 
Already it has been stipulated that sterling area countries 
should cut down their imports by 25 per cent from U. S. 
At present this may not seem a hardship in view of our own 
prevailing balance of payment position but before long 
such a condition may become unbearable in view of our 
needs for machinery and other capital goods Of course 
a clause has been inserted in the agreement which lays 
down that the cut in the dollar expenditure when necessary, 
will be distributed among various members in accordance 
with their economic conditions and standard of living of 
their people. That is to say, a rich country may be asked 
to cut down expenditure more than a poor country. But 
this is still on paper. Much depends on how this clause 
is worked. Secondly it must also be made clear that 
the Dollar Pool arrangements create bilateralism and 
blocs in the world trade which will reduce the volume 
of world trade- This is a bad omen for the world and 
India which believes in internationalism, by joining the 
Dollar Pool, is creating difficulties in the way of the 
establishment of free multilateral international trade. 
This is true but so long the major portion of India's foreign 
exchange resources remains in sterling, as a matter of self- 
interest she must toe the line of sterling and keep it strong. 
Any depreciation of sterling will hit India hard. 


The Government of India communicated the par value 
of the rupee as Is 6d (i.e. equivalent of Is 6d in dollars 
or gold) to the International Monetary Fund without 
consulting the legislature but it was open to them to 
intimate to the fund within 90 days that this par value was 
unsatisfactory and to suggest another parity. Subsequently 
the legislature decided that no change in the par value was 
called for and the period of 90 days was therefore allowed 
to lapse without making any change in the exchange rate 
of the rupee. It is interesting to observe that there was 
surprisingly enough a complete unanimity in the country 
as well as among the legislators with regard to the suita- 
bility of the existing rate of exchange and even those 
interest which were clamourous of a change in exchange 
rate before the war were now insistent on no change 
being made. 

The Constitution of the I. M. F. however allows a 
country to make a change of 10 percent in the par value 
of its currency without permission of the Fund and another 
change of 10 percent with the permission of the Fund. 
Should a contingency arise for devaluation of the rupee, it 
would not be difficult for us to reduce the exchange value 
of the rupee upto 20 percent. 

Of late voices have once again begun to be heard that 
rupee is over-valued and a 20 percent cut in its value will 
restore the much needed equilibrium between the value of 
rupee and foreign currencies. Secondly it is also argued that 
pound sterling is in a very difficult position and in-spite of 
the long protestations of the British Chancellor of Ex- 
chequer it will have to be devalued sooner or later. Even 
such well informed journals as the London " Economist " 
have expressed doubts on the ability of Great Britain to 
stick to the present value of sterling with reference to 
dollar. If sterling is going to be devalued, why should 
rupee be not devalued before hand ? Should we be 
caught napping when devaluation of pound comes? 
Thirdly it is pointed out that India has developed 
huge deficit on the balance of payment account and with 
the present exchange rate it would be impossible for her 
to bridge the gap. A devaluation of rupee is therefore very 
necessary to encourage exports from India and to enable 
her products to compete in foreign markets* Lastly even 


such competent authorities as International Bank are sug- 
gesting a revaluation of European and other currencies to 
get out of the "dollar crisis*'. Why should India not 
follow this advice ? 

It must be admitted immediately that price level in 
India is much higher than in the United States, United 
Kingdom, Canada and Australia. With this price level, rupee 
is over valued. But it must also be clearly understood 
that a devaluation of rupee under the present circum- 
stances will raise the price level still further- We are 
dependent for our food grains on foreign countries, A 
fall in the rate of exchange will increase the price of 
imported food. The consumer will suffer and so will the 
Government of India which is spending about Rs. 40 crores 
at present in subsidijing food imports- Secondly if we 
devalue the rupee and Pakistan does not do it, the cost 
of imported jute and cotton will rise. .It will become more 
difficult for us to market jute manufactures and cotton 
textile in foreign markets than it is at present. Exports 
instead of increasing may fall. Thirdly the cost of imported 
machinery will rise- As the major portion of industry in 
India stands sorely in need of replacement and renewal 
of plant, the industrial cost will go up which will not 
only raise price level in the country still further but will 
also reduce export.- Fourthly, any further raising of prices 
of imported goods will react on the general price level 
and cause further inflation in the country. 

These are weighty arguments. It may be necessary 
to change the exchange rates before long on international 
level but the present is not the time for India to take any 
unilateral action. If any revaluation of currencies comes 
about as a result of an international agreement, India 
should become a party to it. Or if devaluation is deemed 
necessary as a part of some bigger comprehensive economic 
plan in the country, it may be advisable to take the step. 
But in the absence of any such thing, it will be better to 
continue with the present rate until international 
conditions become more stabilized. 


A corollary of India's membership of the International 
Monetary Fund was the weakening of link between the 
rupee and sterling. As soon as India undertook the 
obligation under the Articles of the Fund, she entered the 


framework ot an international monetary system and to that 
extent the ties tint bound her to the sterling area were 
loosened. The concrete form in which the link with ster- 
ling exist was the statutory obligation laid on the Reserve 
Bank of India under sections 40 and 41 of the Reserve 
Bank of India Act to convert rupees into sterling and 
ince versa at specified rates. These sections were repealed 
in April 1947 and rupee was thus freed from the sterling. 
In their place a section was inserted which requires 
the Reserve Bank to buy and sell foreign exchange at 
such rates and on such terms and conditions as the 
Central Government may determine from time to time in con- 
formity with their obligations as a member of the Inter 
National Monetary Fund. This amendment of the Act 
broke the link of rupee with sterling in theory but in prac- 
tice the link continued and as a result of India's decision 
to remain in the British Common Wealth of Nations, it 
was actually strengthened. India is a full-fledged member 
of the sterling area and in view of her major portions of 
her foreign exhan^a resources being in sterling. She is 
interested in keeping pound sterling in a- strong position. 

As has been explained before, the rupee-sterling link in 
the past was an index of the political and financial relation- 
ships between India and England. India's membership of the 
Fund did not involve a complete severance of the link becau- 
se the establishment of the Fund did not exclude the possi- 
bility of closer monetary co-operation among groups of 
countries like the sterling area. It did provide* however an 
opportunity to review the whole question from the stand- 
point of India's own interests. 

There is no doubt that the link with sterling has not 
been wholly beneficial to India during the past and during the 
war, it contributed a great deal towards the development of 
an inflationary situation. But the political decisions of a 


country have far reaching effects on her economic situation. 
We have decided to continue our association with Great 
Britain even after the independence. That association 
involves economic obligations as well. Further, on account 
of the balance of payment difficulties, we have decided to 
be a member of sterling area. We have the assurance now 
that the rupee sterling link is not the result of political 
pressure but is an economic necessity. 


India is in the throes of inflation at present but after 
this inflationary phase is over, she will be confronted with 
the problem of stabilization of prices, particularly of 
agricultural prices. The objectives of monetary policy in 
India have been conceived in a rather narrow way in the 
past and the promotion of stability of prices, trade and 
employment has not been given its due place among them 
In the unsettled conditions of the transitional period and 
in the succeeding period of long range reconstruction and 
planning, a much wider conception of the aims of currency 
policy will be necessary. Not only must the internal price 
and economic structure be protected against wide economic 
fluctuations orginating abroad but the currency policy must 
also be so shaped that highest nossible level of employment 
and producion is reached. With the government of the 
country in our own hands and with the nationalization of 
the Reserve Bank of India, the pursuit of this wider 
monetary policy had become comparatively easier. The 
monetary policy must be related to the economic conditions 
in the country and should aim at stability of employment, 
incomes and prices and avoid the destructive fluctuations 
in the economic life. Even today when the country is faced 
with the gigantic problem of inflation, a monetary and 
financial approach to the problem is likely to bear better 
results than the approach from the side of production on 
which the government seems to be banking at present 
for the solution of its difficulties- 


In the past the monetary policy has centred round the 
stability of rate of exchange. We tried to keep the ex- 
change rate stable at the uneconomic level of 2S gold in 
1921-22 though we lost Rs. 35 crores in the bargain. We 
refused to change rate of exchange in the last thirties 
insp^te of the fact that our price level was very low and 
our exports were being driven out of the world markets. 
Devaluation was very much needed to stop export of gold 
from the country, raise price level and improve economic 
conditions of the agriculturists- Exchange stability should 
no more be a criterion of a sound currency policy. If the 
Reserve Bank were to initiate a policy of credit control 
together with encouragement of savings in rhe country and 
mopping up of surplus purchasing power, prices could be 
brought down to economic levels. There is only one way 
to bring down the prices at the present time. This is 
surplus budgets accompanied by an effective control over 
currency and credit. 

But this is the immediate problem- When the present 
transitional stage is over and prices begin to fall, the 
currency policy will have to be directed towards price 
stabilization especially of agricultural prices. We will have 
to guard against a slump which may land us in more 
difficulties than even the last depression did. 

The Prices Sub-Committee of the Policy Committee on 
Agriculture, Forestry and Fisheries under the chairmanship 
of Sir V. T. Krishanamachari has recommended the fixation 
of a fair price for the farmer. A 'fair price 1 has been 
defined as a price which after meeting the costs of produc- 
tion would leave a representative producer an income 
sufficient to maintain him and his family at a standard of 
life equivalent to that enjoyed by comparable classes of 
the population. Pending the collection of the data of 
costs of production and family budgets, the Committee has 


recommended, as a rough and ready test of 'fairness', the 
parity between agricultural and industrial prices existing 
in the quinquennium of 1924-25 to 1929-30 which is gene- 
rally accepted as a period during which conditions in this 
respect were most satisfactory. The parity shall be 
between agricultural prices on the one side and the prices 
of commodities that enter into the cost of production and 
prices of articles that enter into the cost of living, on the 
other. During the period of control it is proposed that 
parity prices should be fixed on the basis described above. 
During a short period of about 3 years after controls are 
removed, the parity prices shall be subject to a rock- 
bottom minimum and also a maximum- It is stated that 
the only effective manner in which the Government can 
support prices is by freely entering the market when 
necessity arises. For this purpose the Committee has 
suggested the setting up of a Commodity Corporation 
financed by the participating Governments on an agreed 

It is obvious that a Commodity Corporation can stabilise 
prices only within limits ; it can smooth out price fluctua- 
tions arising from temoprary causes but cannot offset basic 
price trends due to fundamental reasons. If world prices 
begin to decline due to structural changes in agriculture, 
Indian prices can to some extent be prevented from falling 
by large-scale market operations by the Corporation- But 
the efficacy of such operations will not extend beyond a 
certain limit. Commodity pools and reserves are not 
effective antidote against the overpowering influence of basic 



It is under conditions of this kind that currency policy 
supplemented by drastic measures like export and import 
prohibitions and quotas can preserve the internal price 
structure against the onslaught of external forces. These 


measures may, of course, lead ultimately to a *closed econo- 
my'. Without closing its economy, no country can, in times 
of trouble and turmoil, escape the impact of world forces. 

If monetary policy is to be utilized as an instrument 
for the attainment of higher levels of income and employ- 
ment, the central Vanking authority should be amenable to 
persuasion and pressure from the government, Any contrari- 
ness or conservatism in the Board of Directors of the Central 
Bank will be highly prejudicial to the successful working 
of such a Policy. If the Government and the Central Bank 
cannot move forward in the same direction and at the same 
pace, a possible way out of the difficulty is for the govern- 
ment, acting on behalf of the nation, to assume direct 
ownership and control of the Bank by buying out all its 

The Bank functioned as almost a department of the 
Government of India and during the war period it shared 
the criticism levelled against the policies leading to the 
development of inflationary conditions. On behalf of the 
Bank, of course, it may be pleaded that it does tender 
advice, whenever occasion demands it to the government 
and it seeks to act in the best interests of the country. 
The public is, however prone to judge the record of the 
Bank by results visible to the naked eye and these some- 
times show that either the Bank gave wrong advice or the 
Government did not listen to it. It has not always been 
able to decide whether to accuse the Bank of collaboration 
or to excuse it for its helplessness. 

With the independence of the country there was no 

danger of the policies of the bank being directed to serve 

extra territorial interest if it was completely subordinated 

to the Central Government by a decree of nationalization 

More over the Government is committed to the policy of 


Economic planning which cannot be carried out without 
a complete control over monetary and financial mechanism- 
The Government of India therefore following the example 
of the British Government passed the Nationalization of 
Reserve Bank of India, Act which raised very little 
Controversy or even debate. The only comment was that 
Imperial Bank of India and other banks should also be 


A scheme for the decimalisation of the Indian coinage 
system was prepared and circulated for opinion by the 
Government of India in 1946. It was proposed to replace 
the present system of coinage, consisting of the rupee, 
the half-rupee and so on down to the pie and based on the 
scale of notation of 4 or 2, by the decimal system under 
which the rupee would be divided into 100 cents and not 
into 192 pies. The rupee would be equivalent to 100 
cents, half-rupee to 50 cents, and four-anna to 25 cents. 
New coins of lower denominations equivalent to 10, 5, 2 
and 1 cents and even i cent would be minted to replace 
the existing two-anna, one anna pieces, etc. 

It need hardly be emphasized that the system would 
represent a sharp break from the present, traditional 
centuries-old system and should be introduced only if the 
present system is utterly outmoded and inconvenient. 
It will be desirable.therefore, to describe briefly the present 
small coin system and to examine the merits and drawbacks 
of the proposed system. 

The small coins in circulation in India are the half-rupee, 
quarter-rupee, two-anna piece, one-anna piece, double 
piece single pice, half-pice and pie. Of these, the half- 
rupee and quarter rupee were issued in the past as both 
standard silver and nickel coins but the nickel coins were 



withdrawn from circulation with effect from the 1st 
October 1924 and the standard silver coins from the 
31 May 1942. Now only the quarternary half-rupee is being 
minted and issued. The standard silver four-anna and 
two-anna pieces are no longer coined, though coins pre- 
viously issued continue to be legal tender. The copper 
double pice are also being withdrawn from circulation. 
A. new series of two-anna, one-anna and half-anna pieces 
in nickle-brass alloy was introduced in 1942 as a war time 
measure. As regards the copper half-pice and pie pieces, 
their coinage was discontinued in 1943 and a new design 
of pice with a different metallic composition and a circu- 
lar hole in the centre was issued- 

The nickel-brass alloy used for minting the two- 
one-anna and half-anna pieces has been found to be unsuit- 
able not only because it involves a disproportionate waste 
of metal in the process of manufacture but also because 
the coins tarnish badly in circulation and due to the uni- 
versal domestic use of brass in India, can be easily coun- 
terfeited. The new pice with the central hole has also 
not been a success. The Government of India have, there- 
fore, decided that as soon as conditions permit, the nickle- 
brass alloy should be replaced by the pre-war cupro-nickel 
alloy and a pice of new design should be issued. It is in 
connection with this huge recoinage programme that the 
Government have under consideration that they want to 
take the opportunity of changing the system of subsidiary 

The table given below brings out the changes which 
the introduction of the proposed system of coinage will 
bring about 

Existing coinage 

Proposed coinage Metallic content of coinage " 

1 Rupee 16 annans or 192 pies 

100 cents 

3 Rupee 8 

or 96 


J Rupee 4 

or 48 


As 2 2 

or 24 

-\ Will be 

r 10 

As. 1 - 1 ,. 

or 12 

( replaced 

3 5 

^ anna 


( by 

\ 2 

1 pice 



( 1 

1 pie 

1 , 


^ i 






As regards the desirability of introducing the decimal 
system of coinage, the case is not so overwhelmingly strong 
as it might at first thought appear. The chief arguments 
advanced in favour of the system are its modernity, sim- 
plicity and convenience. The decimal system has gradually 
displaced all orher systems in most countries of the world 
including Ceylon. China, Iraq, Palestine, Malaya, the 
Netherlands, East Indies and Thailand and it is argued 
that India should fall into line with the modern practice. 
It simplifies accounting and facilitates calculation and save 
much time, energy and money in business and banking 
offices as well as in mathematical training in the schools. 
It is more convenient and less complicated and is thus 
admirably suited to the requirements of modern trade and 
commerce which demand quick and simple methods of 

While recognising all these advantages of the decimal 
system, its suitability in the present context of Indian 
conditions has to be carefully examined. Will it be quickly 
grasped and accepted by the mass of Indian people ? Will 
it simplify Indian methods of accounting and calculation ? 
Now there need be no fear that the system will be oppo- 
sed merely because it is new and represents a break with 
tradition ; for with all their conservatism, the Indian people 
possess in extraordinary degree receptivity for new 
methods which promise solid results. During the period 
of transition to the new system and such a period extend- 
ing over a few years is contemplated when both the pre- 
sent and the new types of small coins below a quarter 
rupee in value will be in circulation simultaneously, some 
inconvenience will no doubt be caused but it can be got 
over, as is proposed, by a wide distribution of slips of 
paper setting forth the arithmetical relation between the 
two types of coinage. As soon as sufficient coins of the 
new series have been minted and the old coins are 


declared as uncurrent the vexation and the inconvenience 
will be over, Having endured all kinds of irritating res- 
traints and discomforts during the war, the Indian public 
(s in any case not likely to demur to the adoption of the 
proposed system merely on this ground- There can, how- 
ever, be objections of a more fundamental character to 
the introduction of the new system and three of them 
deserve notice. In the first place, there has been no demand 
for the decimal system from the people arising out of the 
inconveniences and vexations daily faced by them; nor does 
the proposal seem to have emanated from the Government 
because of steadily accumulating evidence of public 

inconvenience* Secondly, the proposed system does not fit 
in well with the widely prevalent system of weights and 
measures. The Indian weights of maunds, seers and chhataks 
and the Indian measures of yards and girahs make use of the 
same numerial fractions of |, i, i, i J, and so on as the pre- 
sent coinage and this as any businessman will testify 
makes for quickness and facility in calculation. A change in 
the coinage system should accompany and not precede the 
introduction of a new and uniform system of weights and 
measures all over the country. It can be argued that though 
the decimal may be somewhat inconvenient for internal 
transactions, it will be very useful from the standpoint of 
India's participation in world commerce and finance. As 
against that, however, it may be said that in examining the 
suitability of the decimal system, not all transactions but 
only those which involve calculations in terms of small coins 
have to be taken into consideration. Thirdly, it is uncertain 
that in the near future there will be a large demand for small 
coins and if the aim is merely to withdraw from circulation the 
present nickel-brass coins and replace them by cupro-nickel 
coins, it will be desirable to have an estimate of the likely 
expense of this process of change over. 

The system because of the opposition from the 
public and business community was not adopted. The 
old traditional coinage system countinues to operate in 
the country. 



The Government in order to catch money operating in 
the black market promulgated on January 12, 1946 the 
High Denomination Bank Note (Demonetisation) Ordi- 
nance. The holders of currency notes of Rs. 500, Rs. 1000, 
and Rs. 10,000 denomination were asked to get their notes 
cashed at Reserve Bank, a scheduled bank or a government 
treasury within 15 days on giving a declaration on a pres- 
cribed form. Thereafter the Governor and Deputy 
Governor of Reserve Bank were allowed to exchange such 
notes upto 26th April 1946. By another extension of time 
limit the notes of bonafide holders were exchanged by the 
Government of India upto 28th February 1947, The bulk 
of these notes were cashed upto 26th January 1946. The 
number of these notes outstanding on 31st December 1947 
were Rs. 3 lakhs in the case of Rs. 500 denomination, Rs. 
112 lakhs in the case of Rs- 1,000 denomination and Rs.21 lakh 
in the case of Rs. 10,000 denomination as against Rs.26 lakhs 
of the denomination of Rs. 500, Rs. 11,327 lakhs of the 
denomination of Rs. 1,000 and Rs. 1,846 lakhs of the deno- 
mination of Rs. 10,000 on 31st December 1946. Under the 
Demonetisation Ordinance, high denomination notes ceased 
to be legal tenders and therefore the notes of these denomi- 
nations outstanding on 31st December 1947 may be regard- 
ed to have been lost to the public. But besides this loss 
suffered by the holders of these notes and the panic that 
the suddenness of the ordinance created, the government 
failed to achieve its object. The ordinance was more 
dramatic than effective and the Indian economists in the 
course of their second manifesto 1 observed. "The Demone- 
tisation ordinances cannot bear any important consequences 
as long as currency continues to be issued in large amounts t 
week by week- It cannot check either speculative pressure 
on prices or the operation of black marketeers. The ordi- 
nances do not directly reduce the volume of currency. They 
1 Appendix B 


merely change the form in which it is held. They will put 
those notes of high denomination out of circulation the 
holders of which donot present them for exchange within 
the prescribed time-limit. The declaration made by holders 
of high denomination notes will lead to an increase in the 
receipts from taxation of incomes and profits and this 
might also have some deflationary effect. The total 
results in this direction cannot be expected to be large in 
relation to the total value of notes in circulation. On the 
other hand the ordinances might lead to making active 
monetary hoards that were previously dorment. The 
ordinance may result in visiting some malefactors with loss 
or taxation but they cannot be taken to indicate even a 
beginning with the tackling of the real problems that lie 
ahead." The issue of the ordinance showed that the 
government was conscious of the rising spiral of prices and 
it wanted to check it. But demonetization of high denomi- 
nation notes, as was stated by the Indian economists was 
not the proper measure to achieve that object. 


On 18th September 1949, Sir Stafford Cripps made the 
dramatic announcement that Britain had decided with the 
concurrence of the International Monetary Fund to devalue 
the pound sterling by 30"5 percent- The value of pound was 
reduced from 4'03 dollars to 2'80 dollars. The fall in the 
value of pound had been anticipated for sometime past. 
But even the worst prophet had not anticipated a fall of 
30*5 per cent in the value of British currency. 

The Government of India had three alternatives: 

(i) It could decide to continue with the existing 
parity with dollars and refuse to devalue the rupee as 
Pakistan has done. 

(M) It could reduce the rate of exchange more than 
the fall in the value of sterling and establish a parity of 
l$-4d which has been so much desired in the country in 
some quarters. 

and (m) It could keep the rate of exchange stable 
in terms of sterling while reducing the value of rupee in 
terms of dollar in proportion to the fall in the value of 

The first course had the disadvantage that our 
exports would have been ousted from the world markets. 
We are already in a precarious condition in respect of 
balance of payment. If we continued with old rate of 
exchange, conditions would have become still worse. 
The condition in Pakistan are diffierent. She has favour- 
able balance of trade. She exports cotton and jute which 
are demanded all over the world. 

Her exports are absolutely inelastic. She has no 
industry worth the name which is to face the competi- 


tion from countries with devalued currencies. Her decision 
not to devalue her currency is understandable. It will of 
course hit India hard. However India could not adopt this 

As regards second course, this had the disadvantage of 
raising price level in India still further. Prices of goods 
coming from sterling area would also have risen. The 
index number already stands at 390 (September 1949;. It 
would have gone up tremendously. 

The Government wisely adopted the third course 
which has been adopted by 24 other countries. This was 
the right thing to do. 

India did not want devaluation. It was not in her 
interest. But it has been forced upon us by the force of 

Prices of American goods will rise in India by 30 
per cent unless there is a fall in dollar prices in America. 
Prices of goods produced in India and Britain may rise in 
sympathy. Some rise in prices and cost of living is bound 
to occur especially when Pakistan has not devalued her 
rupee. We import cotton and jute from Pakistan besides 
foodgrains. The rise in the prices of cotton will raise 
the price of cloth and our jute manufactures will not get 
any advantage of devaluation as a result of increased cost 
of raw jute that is imported from Pakistan. We may not 
succeed in increasing our exports to United States to any 
considerable extent. While the disadvantages of deval- 
uation are obvious, the advantages we will get are of 
doubtful character. 

The value of our sterling balances has been reduced 
by 30 per cent. This loss has been forced upon us by 
Britain which blocked our balances in London. We did 
not keep our balances in England out of our free will. 
England must compensate us for this loss. 


The value of loans contracted from the International 
Bank has increased in terms of rupees. We were indebted 
by $34 millions to the bank which was equal to Rs. H3 
crores before devaluation. It is now equal to Rs. 168 

Devaluation may make the already bad situation in 
respect of inflation still worse in the country. A race 
between prices and wages may start again. If that comes 
about, it will ruin our economy. 

The decision of Pakistan not to devalue her rupee in 
terms of dollar and appreciate it in terms of sterling and 
Indian rupee is another big blow to Indian economy. By 
her action, Pakistan has neutralized the effect of fall in the 
value of our rupee on our exports of jute to dollar area. 
The cost of imported raw jute will go up by 44 %. More- 
over our exports of cotton cloth to that dominion 
may also suffer because of high cost of cotton that we will 
have to pay for Pakistan cotton. The economies of the 
two dominions will diverge more from each as a result 
of situation created by devaluation. 

Automatism and Elasticity in Indian Currency System 

A sound currency is required, in general terms, to be 
simple and certain and to secure stability, automatism and 
elasticity. Stability means here stability in the external and 
internal purchasing power of the currency unit. The 
external and internal stabilities are, under normal conditions, 
closely interrelated and not incompatible but in times of 
exceptional economic disturbance, emphasis may have to 
be shifted on to internal stability The proper criterion 
of the adequacy of a currency system lies in its capacity 
to secure balanced economic development by maintaining 
'continuity of values'. The indices of this development 
are not merely price-cost levels but also figures about trade, 
employment, prices of shares and movements of capital. 
In the working of the Indian currency system too much 
importance has been attached to exchange stability (i.e., 
stability of external purchasing power) and not enough to 
internal stability. 


There can be no automatism in any absolute sense. 
Some currency systems may be more automatic than others. 
Automatism in currency system cannot mean entire absence 
of control and management. No system has been 
discovered which would relieve the monetary authority 
of all responsibility as to its working. Even in so-called 
automatic systems, there is an element of control. The 
pre-1915 gold standard is sometimes called an automatic 
standard because under it gold movements freely took place 
and by producing their effect on prices corrected disequilibria- 
But the successful working of this system depended on the 
observance of some rules ('rules of the gold standard game') 
and the presence of a certain kind of economic environment. 


"The preservation of the system clearly depended upon the 
policies of Central Banks reflecting such variations as 
would have occured under an automatic system of purely 
metallic currencies with no other types of money". An 
export or import of gold was allowed by the policies of 
central banks to produce its full effect through contraction 
or expansion of currency If some central banks had 
adopted the policy of 'sterilizing' imported gold the 
automatism of the standard could be defeated, as was 
actually done by post- war years. Nor would the system 
work automatically if the exchange parities chosen by the 
countries did not reflect internal prices and costs and 
consequently imposed a servere strain on their economic 

Control and management in currency matters, as in 
other spheres of economic life, now meet general 
approbation. Opinions may, however, differ about the 
objectives of such control and the methods thereof. 

The Indian currency system has not been automatic 
even in the qualified sense except between 1835 and 1893. 
The element of government control was definitely 
introduced from the time mints were closed to the free 
coinage of silver in 1893. Since then the system has been 
deliberately controlled and managed and as no monetary 
authority, least of all a government, can be infallible, 
serious mistakes were sometimes made. The currency 
authority has been until recently the Government of India 
and it was under no obligation to expand and contract 
currency to the full amount of the sale or purchase of 
sterling. As the Hilton Young Commission observed in 
1926. "There is no provision as to any organic relation 
between the total volume of token currency and the amount 
of reserves. So far as the note issue is concerned, the 
statutes provide for no minimum percentage of gold or 
sterling securities being held in the reserve as cover against 
the notes. Nor is there any such fixed relation in regard 
to the other form of token currency the silver rupees. 
The amount of the Gold Standard Reserve and the time 


and manner of its use are wholly within the discretion 
of the Government... The automatic working of the stand- 
ard is thus not adequately provided for in India and never 

has been Under the Indian system, contraction is not, 

and never has been, automatic. On occasions, the obliga- 
tion to buy sterling exchange has been discharged by the 
Government without any corresponding expansion of 
domestic currency. " The commission recommended Gold 
Bullion Standard because, among other things, it would 
be automatic (**, more automatic than the pre-war ex- 
change standard). 

The management of currency and credit has been trans- 
ferred to the Reserve Bank of India since 1935. In so 
far as the Bank is under a statutory obligation to main- 
tain Is. 6d. sterling rate, it has to operate the currency 
system with a definite objective in view. 


Elasticity may be defined as the capacity of the curren- 
cy system to meet the varying requirements of trade and 
exceptional demands of a crisis. It is an important requi- 
site for the Indian currency system because of the seasonal 
demand for currency to finance crop movements. 

The Indian currency system was based, until recently, 
on the principle of fixed fiduciary issue, i.e., beyond a cer- 
tain amount of currency issued against securities, expansion 
or contraction could take place at a rate exactly corres- 
ponding to the increase or decrease of the amount of 
metal or coins kept in the reserves. The disadvantage of 
such a system is that currency can not be expanded at a 
rapid rate owing to statutory requirement of 100 per cent 
reserve against additional note-issue and in times of emer- 


R^ncy the system may break down. Moreover, there was 
no arrangement by which additional currency could be 
provided for the requirements of internal trade. 

The Paper Currency Act of 1861 provided for a fiduciary 
issue (i.e.. issue against securities or invested portion of tlie 
reserve) to a maximum of Rs- 4 crores. The amount was 
increased to Rs. 14 crores by 1911. During the War years 
(1914-1918) it was increased several times and stood at the 
end of War at Rs, 120 crores. In 1923 and 1925, provision 
was made to issue currency notes upto a maximum of Rs- 12 
crores against hundis or internal bills of exchange. The 
remarks of the Hilton Young Commission about this 
provision explain also the difficulty of introducing elasticity 
in Indian currency system. "This provision has had benefi- 
cial effect in practice, but it is not in our opinion capable of 
development and improvement in connection with a reorga- 
nisation of the basis of Indian currency- Any such provision 
depends for its proper operation on a plentiful supply of 
genuine trade bills. But in India, for a variety of reasons, 
most of the internal trade is financed by a system of cash 
credits or by the advance of money against demand 
promissory notes. It has therefore been found difficult to 
secure an adequate volume of bills as cover against the 
seasonal increase. As a result, the currency authority has 
on occasions been forced to provide for the needed elasticity 
by regulating its holding of sterling securities in the 

The Commission recommended the adoption of the Pro- 
portional Reserve System under which the reserve bears a 
certain proportion to the note-issue, say, 40 : 100. If 40 
units are added to the reserve, note-issue can be increased 


by 100 units and if 40 units are taken out, note-issue has 
to be contracted by 100 units. The range of expansion 
and contraction is, therefore, much wider than under the 
fixed fiduciary system. The system has been incorporated 
it* the constitution of the Reserve Bank of India which has 
to hold 40 per cent reserve of gold bullion, gold coin or 
sterling securities, the amount of gold coin and bullion 
being not less than 40 crores of rupees in value. To secure 
an emergent issue of currency, there is a provision for a 
reduction in the reserve ratio below 40 per cent with the 
sanction of the Governor General-in-Council and on 
payment of a graduated tax. 

These provisions are of value but to lend the much 
needed elasticity to the currency system it is necessary to 
encourage the habit of using cheques as the media of 
payment and to develop a bill market. The Reserve Bank 
has already done a good deal in tempering the seasonal 
stringency and in keeping the rise in interest rates in the 
Indian money market under control. It can render further 
assistance in the direction of the development of a bill 

Indian Economists' First Manifesto 

" The rapid rise in the general price level during the pdst 
two years and the enormous expansion of currency in India 
are, we feel, causally related. The unprecedented 
expansion of currency since the war began is due chiefly 
to the system adopted for financing the large British and 
other Allied purchases in India, under which the Govern- 
ment of India, accepts payment in sterling and provides 
rupees in exchange. For all these purchases India acquires, 
under present arrangements, sterling assets in London and 
against these there occurs an expansion of currency in 

The provision of internal finance in India for these pur- 
chases is a necessary concomitant of the accumulation of 
sterling assets in London and the responsibilily for this 
financing falls on the Indian Government in the same 
manner as that for any part of the expenditure included in 
its regular budget. The failure of the Government of India 
to recognise this fundamental and essential fact has 
prevented it from taking the proper view of the economic 
and financial situation in the country. 

The Government seems to act as if it is enough for it to 
take care of its own budget deficit while meeting the needs 
of the British Government by printing more notes- This is 
a grave misreading of the whole situation and has resulted 
to an ever increasing expansion of currency unrelated to 
the needs of internal production and trade. As a result, 
the inflationary spiral is already at work in India. 


The net inflationary gap in India's finances, counting in 
the finance made on behalf of His Majesty's Government, 
is thus being wholly filled by the creation of more currency. 
The inflation in India L, therefore, a deficit induced fiat- 
money inflation, It is the most disastrous type of inflation. 
The repatriation of India's sterling obligations does not 
act as an anti-inflationary factor, except to the extent to 
which the rupee counterparts are taken up by the public - 
but this has so far been only small in proportion, 

The increased liquidity preference of the public, which 
is at present tempering the rise in prices, cannot be 
expected to last long with a continuously rising price level. 
The experience of many European countries after the 
Great War emphasises the danger of counting on a 
continuance of this phenomenon. It is clearly a temporary 
phase and with a further rise in prices a preference for 
holding commodities instead of money might suddenly 
manifest itself. 

Inflation is the most inequitable way of distributing the 
war burden and usually involves large transfers of wealth 
from the poorer and the middle classes to the richer classes. 
It is also undesirable because it increases the cost of war 
and impairs the war effort by hindering production 
and distribution. Its consequences to economic society 
are immediately felt ; it, however, also holds the threat of 
bringing about later political consequences of an even 
graver nature* 

We earnestly feel that immediate and drastic measures 
to check inflation are called for. In this connection we 
urge on the Government of India the primary necessity of 
closing the 'gap' by increased taxation and borrowing. 


Taxation, in our opinion, should be raised to the highest 
practicable pitch, adjusted to shoulders that can best bear 
it. We suggest a much steeper progression in income tax 
rates, the laying of a maximum limit to individual consump- 
tion income and absorption of all profits above a limit, either 
in tax revenue or to be impounded into special loan 
contributions. To increase the volume of borrowings to 
the required level, it is necessary to institute a compre- 
hensive scheme of compulsory savings as well as a rigid 
control of all investment outlets. 

This programme should be brought into effect with great 
rapidity. However it will take some time before the in 
flationary gap is completely closed and the total currency 
in circulation is to-day already greatly redundant, even 
at the existing high prices. To tie up this vagrant purcha- 
sing power we propose the immediate initial steps of a 
blanket control of all prices followed by a strict examina- 
tion of all later allowable increases- 

In order to make this price control measure effective 
a policy of centralised supervision and direction of pro- 
ductive effort will be necessary. This will in its turn in- 
volve equally strict regulation of transport and distribu- 
tive machinery on a national scale. A rationing of the 
essential necessities of life should be undertaken to as 
large an extent as possible. An effective control of prices 
will involve a wage stop but this will mean no hardship 
as long as the price rise is stayed. An equally strict pro- 
fits stop is indicated as a corollary of this policy as well 
as independently on account of financial considerations. 

In our opinion, only such a comprehensive view of 
economic policy is capable of averting the grave economic, 
political and social consequences of the continuance of the 


present process of inflation. We would also emphasize 
that the total liabilities undertaken by the Government ol 
India, whether on their own account or on account of the 
British and Allied Governments, should not exceed the re- 
sources that they find possible to raise in pursuance of the 
policy- outlined by us." 

Indian Economists* Second Manifesto 

''The uninterrupted expansion of currency against the 
increase of sterling securities in the Issue Department of 
the Reserve Bank of India, even after the cessation of 
hostilities, and the prospect of its indefinite continuance 
revealed by Dr. Dalton's assertion, during his speech in 
the House of Commons on the Anglo-American Agreement, 
that the sterling balances within the sterling area would 
continue to grow, impel us once again to repeat the war- 
ning, given in a previous manifesto, (dated 12 April 1943), 
against the financial policy pursued by the Government of 
India. By continuing to finance the purchases of His 
Majesty's Government in India by the same inflationary 
procedure as during the war the Government of India is 
driving Indian economy almost to the brink of disaster. 

"The glaring mismanagement of currency and finance 
and the inefficient and inept working of economic controls 
during the war have created a host of intractable post-war 
problems. Instead of trying to tackle these by an appro- 
priate economic and financial policy the Government of 
India seems to be satisfied with resorting to such merely 
palliative measures as a the recent Demonetization Ordi- 
nances. The Demonetization Ordinances cannot bear any 
important consequences as long as currency continues to 
be issued in large amounts, week by week. It cannot check 
either speculative pressure on prices or the operation of 
black marketeers. The ordinances do not directly reduce 


the volune of currency ; they merely change the, form in 
which it is held- They will put those notes of high deno- 
mination out of circulation the holders of which do not 
present them for exchange within the specified time-limit. 
The declarations made by holders of high denomination 
notes will lead to an increase in the receipts from the 
taxation of incomes and profits and this might also have 
some deflationary effect. The total result in this direction 
cannot, however, be expected to be large in relation to 
the total value of notes in circulation. On the other 
hand, the ordinances might lead to making active monetary 
hoards that were previously dormant. The ordinance may 
result in visiting some malefactors with loss or taxation but 
they cannot be taken to indicate even a beginning with the 
tackling of the real problems that lie ahead. For we 
must repeat the elementary economic truth, that the 
forces of inflation and the resulting operations of black- 
marketeers and profiteers cannot be brought under check 
while deficit-induced fiat money inflation keeps on. 

"We had stressed the necessity, even during the war, 
of limiting the total liabilities undertaken by the Govern- 
ment of India on all accounts, to the resources that they 
were able to raise by taxation and borrowing. What- 
ever justification there might have been for ignoring this 
warning during the war period, and lending far beyond 
India's capacity at the cost of unprecedented hardships to 
the people of India, this has disappeared with the end 
of hostilities. 'Financial help, now being extended by 
India, is no-longer required for winning the war ; it only 
helps in the rehabilitation and reconstruction of the borro- 
wing country, namely Britain. The justification of loan 
is to found in the relative resources, current and capital, 
of lender and borrower and the issue needs to be raised 
whether India is in a position to lend at all. Consider- 
ing her immediate consumption needs it is clear beyond 


doubt that India has no lending capacity. During the 
war the standard of consumption of India's people has 
declined even below the precarious pre-war levels. During 
the current year in particular, famine, probably the 
worst of the past two decades, stalks Peninsular India, 
threatening to bring about enormous suffering. We need 
all the imports we can get immediately of such essentials 
as rice and wheat. Apart from pressing consumption needs 
the urgency of utilising every available resource that 
we can obtain for internal rehabilitation and reconstruction 
is demonstrably plain. In these circumstances, we feel 
that in continuing to lend to Britain, the Government of 
India, while attending to the convenience of that country, 
is being unjustifiably negligent of India's legitimate in- 

"Moreover, the most remarkable thing about this lend- 
ing is that it is being achieved by the worst possible 
method, that of currency inflation. The deficits to finance 
which currency was inflated on such a large scale during 
war were not those of the Government of India but those 
of His Majesty's Government. During the last few months 
the process has continued so that from 31st August 1945 
to llth January 1946 the total currency issued increased 
from Rs, 11,45 crores to Rs. 12,36 crores as against the 
parallel rise in the value of sterling securities from Rs. 
10,34 crores to Rs. 11,20 crores- 

"Unbelievable as it may seem, India is to day being 
forced to add to her sterling balances with almost 
certain prospect of her being forced to give up a part 
of them in the near future. In this connection it must be 
pointed out that sterling balances built up to India's 
credit during war represent real resources thit she had 
to sacrifice at the cost of suffering and starvation. The 


cost cannot be just written off because it has been already 
borne in the past. For we would emphatically assert that 
this huge cost would never have been visited on the 
country and India would never have been deemed cap- 
able of bearing it, if the financial policy of India had 
been governed by the policy of contributing the utmost 
to the war effort consistent with the maintenance of 
minimum national standards, which ruled in the self- 
governing Dominions. All section of people in India are 
concerned over the grave deficiencies in our Industrial and 
other capital equipment and every plan of reconstruction 
and development made so far has depended on the ster- 
ling balances being available for the finance of its capital 
programme. The extent to which and the time at which 
they will be availabe seems uncertain to-day. But we 
at least insist with all the force at our command that the 
size of this problematic quantity should not increase. The 
first thing that must happen to the sterling balances is 
that they should cease to grow. 

'The manner in which all sections of British opinion 
have reacted to the Anglo-American Agreement should 
serve as an object-lesson to us Indians. What appears to 
third parties as a loan unprecedented in history generous 
both in conception and magnitude, is being assailed on all 
sides in England as a hardhearted bargain. If the condi- 
tions of that agreement are hard, we are at loss to descri- 
be in appropriate terms this compulsion on a poor famine- 
stricken country of lending through currency inflation, large 
sums to a country which is among the richest in the 




. The Government of India and some of the provincial 
governments have granted dearness allowances to some 
classes of their employees. Similarly the Railway 
administration and private employers have given dearness 
allowance to the workers. But the issue has been raised 
in certain quarters that the grant of dearness allowance to 
low-paid government employees sets into motion an 
inflationary spiral of rising wages (or salaries) and prices. 
The issue may be briefly examined here. 1 

Three or four questions that atonce arise are .* 

(a) Is there any causal nexus at all between the grant of 

dearness allowance and rise in prices ? 

(b) If dearness allowance does eventually result in raising 

prices, to what extent will it do so ? 

(c) What will be the magnitude or force of dearness 

allowance as a factor in the price situation relatively 
to other factors at work ? 

(d) Is there any implication that if dearness allowance 

raises prices to some extent, therefore its payment 
is undesirable ? 

As regards (a), it may be admitted that under certain 
conditions the payment of dearness allowance will cause 
prices to rise. If the amount paid as dearness allowance 
swells the existing quantity of monetary circulation or 
money incomes and the quantity of goods remains the 

T That the Government are anxious to limit tjje rates of dearness 
allowance is clear from the Draft Rules under the Excess Profits Tax 
Act, 1940 published by them in November 1943. The Rules provide 
limits upto which payments o dearness allowance, bonus and commis- 
sion shall be admissible for purposes of the deduction of Excess profits 
Tax Earlier in October 1943, the Government had appointed a 
committee under the chairmanship of Sir Theodore Gregory to determine 
and report on what principles dearness allowance should be fixed. 

292 APPENDIX" *o 

same, that is, if it represents the creation of additional 
spending power against a constant supply of goods, it 
will certainly force prices upwards. This will happen if 
money for the payment of the allowance comes out of 
either the idle balances of the Government or funds which 
otherwise would have been invested in Defence loans or 
spent on war effort or through the taxes paid out of the 
savings of the richer classes lying idle in banks or such 
other savings which, if not drawn upon by taxes, would 
have been invested in Defence loans. (In parenthesis, 
it may be observed that the spending of, say, one crore of 
rupees by Government on the purchase of grain for the 
army or on munitions, is quite a different affair from the 
spending of the same amount by the Government em- 
ployees ; for the very essence of war economy is 
that the Government must spend more on war needs and 
obtain command of large real resources and persons in, 
what may be called, the civil sector of economy spend less 
and have smaller command over real resources.) If the 
funds for the payment of dearness allowance are obtained 
merely by the process of appropriation of spending power 
from one class of persons to transfer it to another class, 
then the Government discharges its purely normal function 
which has no inflationary significance. 

Reference may be made here to the evidence of theory 
and experience that in the Vicious spiral' is its wages that 
chase prices, The spiral almost invariably begins with an 
uncontrolled rise in prices generated by inflationary 
methods of war finance. In the earlier stages and even in 
later stages, therefore, price rise continues to occur 
independently ot stimulation by wage increases and in 
fact wage increases play a subordinate part, Payment of 
dearness allowance to some classes of Government 
employees will obviously be an even less significant factor 
in the total situation. 


As regards (b) it is difficult to define in the absence of 
accurate data about the total number of low paid Govern- 
ment employees or their total salary bill the extent to 
which dearness allowance will raise prices (that is, if it 
raises them at all). It would, however, be hardly wide 
of tke mark to reckon the total amount of dearness 
allowance as a few crores, say 15 or 20 crores in a. year, 
for the central and provincial governments together. (In 
the Punjab the total number ot Government emplo3' r ees 
in 1939-40, was reckoned at 75,534 and the total amount 
of pay and allowances at about Rs. 5i crores). Dearness 
allowance may, of course have to be adjusted to changes 
in prices and cost of living and this may well mean its 
amount will increase in a cumulative manner, But consi- 
dering that the additional purchasing power in the form of 
note circulation has expanded in India by about Rs. 250 
crores between January 1943 and December 1943 alone, 
dearness allowance will, in any case, be a negligible affair 

This necessity leads to an inquiry into the forces at 
work behind the rise in prices in India. For if these forces 
are really amenable to control, introduction of an exciting 
factor in the shape of dearness allowance will be undesirable. 
The position in a way is the same as during the last war 
when the leaders of working classes in England said to the 
Government 'Stop the rise in prices and we will stop 
the rise in wages 1 . Unfortunately, whether by the force 
of circumstances or by the weakness of Government, this 
counsel of prefection was not followed. In India also an 
overpowering impersonal necessity seerns to be the master, 
causing expansion of currency and inflation of money 
incomes. Even granting that there is no inflationary issue 
of currency ('credit inflation/ as Sir J- Raisman put it) in 
India and that currency is being expanded in a legitimate 
manner through Government purchases of commodities 
and services, there is no doubt that a situation 


(Sir J. Raisman called it 'temporary') has arisen in which a 
large amount of spending power is pressing against a more 
or less limited supply of consumers' goods. This situation 
may perhaps be temporary in the sense that now when the 
war is over, accumulated sterling against which currency 
is expanded may be used to purchase and import f * large 
quantities of goods into India- But while the war was on, 
currency expansion was bound to continue and along with 
some other forces, such as speculative hoarding, 
could drag prices upwards-unless, of course, by extensive 
and heavy borrowing, control of speculation etc., rise in 
prices was kept under control 1 - (One may here enter a 
caveat against the arguments of some Indian businessmen 
that what we were faced with was commodity scarcity and 
not monetary inflation- They seemed to overlook that 
scarcity of consumers' goods was an inevitable outcome 
of war; for resources must be drawn away from the produc- 
tion of war goods. What they seemed to drive at was 
that the production of consumers' goods as well as the 
production of war goods could be increased, the tacit 
assumption being that there existed unutilised or unemploy- 
ed resources in the country which could be used both ways. 
But even so there must be some proportion maintained 
between the quantity of consumers' goods and the spend- 
ing power to be used against them. Actually there was 
a big disproportion and it required quite an amazing feat 
of faith to believe that this disproportion could be quickly 
rectified by devoting more resources to the production 
ot consumers' commodities,) 

L Professor Brij Narain worked out a law go veiling the variation 
of note circulation from the examination of statistics between September 
1941 and December 1942. This law connecting X (time; and Y (note 
circulation) is given as : 


If this law continued to govern the increase of note circulation, the 
total amount of note circulation would have been as follows : 

March 1943 ... 614 crores March 1944 ... 853 crores 

June 1943 ... 674 ,. June 1944 ... 913 

Sept, 1943 ... 734 Sept. 1944 ... 974 

Dec. 1943 ... 793 ., Dec. 1944 ... 1032 


Coming now to W), as the expansion of currency 
continues and prices continue to rise, it becomes difficult to 
maintain any case against the payment of dearness 
allowance even if it may be admitted that dearness 
allowance is a price exciting factor. Expansion of currency, 
as is well known, must take the form of an increase in 
money incomes of some persons or classes before it exerts 
its influence on prices of consumers' goods. If dearness 
allowance is not paid, it will only mean that the money 
incomes of one class of persons are prevented from 
increasing while large scale government spending is inflating 
the incomes of other classes. Relatively to other classes, 
therefore, and also absolutely, the real incomes of this 
particular class are being reduced. In an absolute sense 
there must, of course, be a cut in the consumption of all 
the classes, if war is to be effectively prosecuted. But 
there must be at the time an equitable distribution of the 
burdens thus imposed. The real incomes of employees 
getting fixed and low money incomes have, in fact, already 
been reduced a little too much relatively to the incomes 
of other classes. Dearness allowance paid now can prevent 
further deterioration and not compensate for a past injury. 

Is there any alternative to the payment of dearness 
allowance which will serve the same purpose and yet be 
not open to the objections that can be urged against the 
latter? The alternative, obviously, is a guarantee that 
for these employees essential commodities of consumption 
will be available at fixed and low prices. The employees 
themselves may prefer this because dearness allowance 
usually tends to lag behind rising prices. But the Govern- 
ment must place themselves in a position to give such a 

Whether or not dearness allowance is given, there is no 
escape for the Government from the time-worn and well- 
tested remedies of price control and rationing if all the 


consumers with fixed or low incomes are to be assured an 
adequate minimum of the essential articles of consumption. 
Price control and rationing have their separate functions 
but serve a common purpose. Rationing secures a mini- 
mum of necessities for all and price control ensures that 
minimum is available at a fair or reasonable price. Taken 
together they go far but perhaps not far enough. For the 
price that is fair for producers and some classes of consu- 
mers may still be unfair or* unreasonably high for large 
bodies of consumers with low incomes. Here is a lacuna 
which the Government can remove by purchasing commodi- 
ties at the fair prices and selling them to low income 
consumers at a price which they can afford to pay, the 
difference between the two prices representing the financial 
cost of the transaction to the Government. It will be 
seen that this subsidisation of consumption or consumers' 
subsidies will benefit the needy few just as price control 
and rationing benefit all. This need not, however, be the 
general rule and consumers' sudsidies can be given and 
have been given in countries like U. K., U. S. A. and 
Canada to lower prices of certain essential goods for the 
consumers in general- 1 For apart from the fact that all 
can be needy when it comes to the possibility of paying a 
lower price, there is the vital consideration that lower 
prices for all mean a lower cost of living and the stabilisa- 
tion of cost of living at a low level is a useful check to the 
prices feeding on themselves by raising wages and cost 
of production and starting what Pigou has called ^age- 
induced inflation*. 2 In this sense and in this sense 
alone consumers' subsidies can be said to be anti-infla- 
tionary. For otherwise the cost of subsidies itself must 
be met and if it is met by inflationary finance, a lot of 
superfluous purchasing power will go into the economic 
system creating an inflationary situation and imperilling 
price control itself. 

* In England food subsidies amounted to over 102 millions in 1942. 
(I. L. O: Food Control in Great Britain, pp. 48-48), In U.S.A. food 
subsidies have formed an important part of the anti-inflation prog- 
ramme but the effect of the Anti-Subsidy Bill passed by the House of 
Representatives was to make subsidies illegal after December 1943. 

' 2 Economic Journal, 1941, pp. 440-42. It is necessary to note that 
subsidies, if they are to accomplish their purpose, should be heavy 
enough to bring the price within the reach of the lower income groups, 
otherwise subsidy is a "uaste of public funds better to double the 
subsidy if necessary or drop it entirely." (Food Control in Great 
Britain, p. 9.) 


Following is the text of Financial Agreement between 
Governments of United States and United Kingdom: 

It is hereby agreed between the Government of the 
United States of America and the Government of United 
Kingdom of Great Britain and Northern Ireland as follows: 

1. Effective Date of the AgreementThe effective date 
of this agreement shall be the date on which the Govern- 
ment of the United States notifies the Government of the 
United Kingdom that the Congress of the United States has 
made available the funds necessary to extend to the Govern- 
ment of the United Kingdom the line of credit in accor- 
dance with the provisions of this agreement. 

2- Line of credit: The Government of the United 
States will extend to the Government of the United 
Kingdom a line of credit of dollars 3,750,000,000 which may 
be drawn upon at any time between the effective date of 
this agreement and 31st December, 1951 inclusive- 

3. Purpose of the line of credit: The purpose of the 
line of credit is to facilitate purchase by the United King- 
dom of goods and services in the United States to assist the 
United Kingdom to meet transitional post-war deficits in 
its current balance of payments, to help the United King, 
dom to maintain adequate reserves of gold and dollars and 
to assist the Government of the United Kingdom to assume 
the obligations of multilateral trade as defined in this and 
other Agreements. 

4- Amortisation and interest : (1) The amount of the 
line of credit drawn by 31st December, 1951 shall be repaid 
in 50 annual instalments beginning on 31st December, 1951 


with interest at the rate of 2 per cent per annum. Interest 
for the year 1951 shall be computed on the amount out- 
standing on 31st December 1951 and for each year there- 
after interest shall be computed on the amount outstanding 
on 1st January of each such year. 49 annual instalments 
of principal repayments and interest shall be equally 
calculated at the rate of dollars 31,323,000 for each dollars 
1>000,000.000 of the line of credit drawn by 31st December, 
1950 and the fiftieth annual instalment shall be at the rate 
of dollars 31,640,736 65 for each such dollars 1,000,000,000 
Each instalment shall consist of the full amount of the 
interest due and the remainder of the instalment shall be 
the principal to be repaid in that year. Payments required 
by this section are subject to the provisions of section 5. 
(2) The Government of the United Kingdom may accele- 
rate payment of the amount drawn under this line of credit. 

5. Waiver of interest payments: In any year in which 
the Government of the United Kingdom requests the 
Government of the United States to waive the amount of 
the interest due in the instalment of that year, the Govern- 
ment of the United States will grant the waiver if (A) The 
Government of the United Kingdom finds that a waiver is 
necessary in view of the present and prospective conditions 
of international exchange and the level of its gold and 
foreign exchange reserves and (B) the International 
Monetary Fund certifies that the income of the United 
Kingdom from home produced exports plus its net income 
from invisible current transactions in its balance of pay- 
ments was on the average over the five preceding calendar 
years less than the average annual amount of United King- 
dom imports during 1936-38 fixed at pounds sterling 
866,000,000 as such figure may be adjusted for change in the 
price Jlevel of these imports. Any amount in excess of 
43,750,000 released or paid in any iyear on account of 


sterling balances accumulated to the credit of overseas 
Governments, Monetary Authorities and Banks before the 
effective date of Agreement shall be regarded as a capital 
transaction and shall not be included in the above calcula- 
tion of the net income from invisible current transactions 
for that year. If waiver is requested for an interest pay- 
ment prior to that due in 1955 the average income shall be 
computed for the calendar years from 1950 through the 
year preceding that in which the request is made- 

6. Relation of this line of credit to other obligation :(1) 
It is undersfood that any amounts required to discharge 
obligations of the United Kingdom to third countries out- 
standing on the effective date of this Agreement will be 
found from resources other than this line of credit. (2) 
The Government of the United Kingdom will not arrange 
any long termloans from Governments within British Com- 
monwealth after 6th December 1955 and before the end 
of 1951 on terras more favourable to the lender than the 
term c of this line of credit. (3) Waiver of interest will 
not be requested or allowed under section 5 in any year 
unless the aggregate of the releases or payments in that 
year of sterling balances accumulated to the credit of over- 
seas Governments, Monetary Authorities and Banks (except 
in the case of Colonial Dependencies) before the effective 
date of this Agreement is reduced proportionately and 
unless interest payment due in that year on loans referred 
to in (2) above are waived. The proportionate reduction 
of the releases or payments of sterling balances shall be 
calculated in relation to the aggregate released and paid 
in the most recent year in which waiver of interest was 
not requested. (4) The application of the principles set 
forth in this section shall be the subject of full consul- 
tation between the two Governments as occasion may arise. 


7. Sterling area exchange arrangements : The Govern- 
ment of the United Kingdom will complete arrangements 
as early as practicable and in any case not later than one 
year after the effective date of this agreement unless in 
exceptional cases a later date is agreed upon after consul- 
tation under which immediately after the completion of 
such agreements the sterling receipts from current trans- 
actions of all sterling area countries (apart from any 
receipts arising out of military expenditure by the Govern- 
ment of the United Kingdom prior to 31st December 1948 
to the extent to which they are treated by Agreement with 
the countries concerned on the same basis as the balan- 
ces accumulated during the war), will be freely available 
for current transactions in any currency area without 
discrimination with the result that any discrimination arising 
from the so-called sterling area Dollar Pool will be entirely 
removed and that each member of the Sterting Area will 
have its current sterling and dollar receipts at its free 
disposition for current transactions anywhere- 

Other exchange arrangements : (1) The Government of 
the United Kingdom agrees that after the effective date 
of this Agreement it will not apply exchange ontrols in such 
a manner as to restrict (A) payments or transfers in respect 
of product of the United States permitted to be imported 
into the United Kingdom or other current transactions 
between the two countries or (B ) the use of sterling balan- 
ces to the credit of residents of the United States arising 
out of current transactions. Nothing in this paragraph 
( 1) shall affect the provisions of Article VII of the Arti- 
cles of Agreement of the International Monetary Fund 
when those Articles have come into force. (2) The 
Governments of the United States and the United King- 
dom agree that not later than one year after the effective 
date of this Agreement, unless in exceptional cases a 
later date is agreed upon after consultation, they will im- 

AFPfcWDIX *> 301 

pose no restrictions on payments and transfer for current 
transactions. The obligations of the paragraph (2) shall 
not apply (A) to balances of third countries and their 
nationals accumulated before this (2) becomes effective 
or (B) to restrictions imposed in conformity with the 
Articles of Agreement of the International Monetary Fund 
provided that the Governments of the United Kingdom 
and the United States will not continue to invoke the 
provisions of Article VII Section 2 of those Articles after 
this paragraph (2) becomes effective unless in exceptional 
cases after consultation they agree otherwise or (C) to 
restrictions imposed in connection with measures design- 
ed to uncover and dispose of assets of Germany and Japan. 
(3) This Section and Section 9 which are in anticipation 
of more comprehensive arrangements by Multilateral 
Agreement shall operate until 31st December 1951. 

9. Import Arrangements: If either the Government 
of the United States or the Government of United 
Kingdom imposes or maintains quantitative imports restric- 
tions, such restrictions shall be administered on a basis 
which does not discriminate against imports from the 
other country in respect of any product provided that this 
undertaking shall not apply in cases in which (A) its 
application would have the effect of preventing the country 
imposing such restrictions from utilizing for the purchase 
of needed imports in convertible currencies accumulated 
up to 21st December 1946 or (B) there may be special 
necessity for the country imposing such restriction to 
assist by measures not involving a substantial departure 
from the general rule of nondiscrimination a country 
whose economy has been distrupted by war or (C) either 
Government imposes quantitative restrictions leaving 
equivalent effect to any exchange restrictions that Govern- 
ment is authorised to impose in conformity with Article 
VII of the Articles of Agreement of the International 
Monetary Fund, The provisions of this section shall 
become effective as soon as practicable bur not later than 
31st December, 1949. 


10. Accumulated Sterling Balances: (1) The Govern- 
ment of the United Kingdom intends to make Agreements 
with countries concerned varying according *to the circum- 
stances of each case for an early settlement covering the 
sterling balances accumulated by Sterling Area and 
other countries prior to such settlement (together with^any 
receipts arising out of military expenditure by the Govern- 
ment of the United Kingdom to the extent to which they are 
treated on the same basis by Agreement with the countries 
concerned). The settlements with the Sterling Area 
countries will be on the basis of dividing these accumulated 
balances into three categories: (A) balances to be releas- 
ed at once and convertible into any currency for current 
transactions (B) balances to be similarly released by instal- 
ments over a period of years beginning in 1951 and (C) 
balances to be adjusted as a contribution to the settlement 
of war and post-war indebtedness and in recognition of 
the benefits which the countries concerned might be expec- 
ted to gain from such a settlement- The Government of 
the United Kingdom will make every endeavour to secure 
the early completion of these arrangements. (2) In 
consideration of fact that an important purpose of the 
present line of credit is to promote the developments of 
multilateral trade and facilitate its early resumption on a 
ndn-discriminatory basis, the Government of United 
Kingdom agrees that any sterling balance released or other- 
wise available for current payments will not later than one 
year after the effective date of this Agreement, unless in 
special cases a later date is agreed upon after consultation, 
be freely available for current transactions in any currency 
area without discrimination. 

11. Definitions. For the pusposes of this Agreement, 
the term Current Transactions shall have the meaning 
prescribed in Article VI (I) of the Article of Agreement 
of the International Monetary Fund, (2) the term Sterling 
Area means the United Kingdom and the other territories 


declared by the Defence (Finance) (Definition of Sterling 
Area) (No. 2) Order 1944 to be included in the Sterling Area 
namely, the following territories excluding Canada and 
Newfoundland that is to say (A) any Dominion (B) any 
other part of His Majesty's Dominion (C) any territory in 
respect of which a mandate on behalf of the League of 
Nations has been accepted by His Majesty and is being 
exercised by His Majesty's Government in the United King- 
dom or in any Dominion (D) any British Protectorate or 
Protected state (E) Egypt, the Anglo-Egyptian Sudan and 
Iraq (F) Iceland and the Faroe Islands. 

12. Consultation on Agreement. Either Government 
shall be entitled to approach the other for reconsideration 
of any of the provisions of this Agreement if in its opinion 
the prevailing conditions of international exchange justify 
such reconsideration with a view to agreeing upon modifica- 
tions for presentation to their respective legislature. 



A Theory 

CROWTHER An Outline of Money, 1940. 

Monetary Policy and Economic Stabilisation, 1937. 

Lessons of Monetary Experience, 1939. 
GREGORY, T. E. -Gold Standard and its Future, 1934. 
HABERLER, G. Prosperity and Depression, 1941. 
HAYEK, F. A. Monetary Nationalism and International 

Stability, 1939. 

HEILPERIN, M International Monetary Economic, 1939. 
HODSON. H. V. Slump and Recovery, 1938. 
I. L. O. Studies in War Economics, 1941. 

A Treatise on Money, Vol, I, Chaps. IV-VIII, 
Vol. II, Book VII, 1930. 

General Theory of Employment Interest and 
Money, 1936. 

MBTNDERSHAUSEN, H. Economics of War, 1940. 
MISES, L. Theory of Money and Credit, 1938. 
PIGOTT, A. C. Political Economy of War, 1940. 
Monetary Policy and Trade Depression, 1934. 
The Future of Monetary Poicy, 1935. 

SATJLNIER, R. J. Contemporary Monetary Theory, 1939. 
WIOKSELL, KNTJT. Lectures on Political Economy, Vol. II, 

Wtr, C, Y. International Price Theories, 1939. 

JB. Indian (Currency 

ADARKAR, B. N. The Devaluation of the Rupee, 1936. 
ADARKAR, B. P. Indian Monetary Policy, 1939. 
BLACKETT, SIB BASIL, A Lecture on the Indian Currency 


Hilton Young Commission's Report, 1926. 
BRIJ NARAIN Indian Economic Problems, 1944 

Money and Banking, 1946. 

Indian Currency, Banking and Exchange, 1932, 
. Studies in Indian Currency and Exchange, 1931. 


The Indian Currency System, 18351926. 1930. 

India's Currency Exchange and Banking Problems, 1925- 

28, 1928. 
DADACHANJI History of Indian Currency and Exchange, 


GADGIL, D. R. War and Indian Economic Policy, 1944. 
GANGULI, B. N. Whither Rupee ?, 1939. 


The War and the Rupee, 1943. 

A Study of the Indian Money Market, 1943. 
GHOSH, D. The Rupee during the War, 1943. 
GREGORY. Memorandum on Indian Monetary Policy, 1944. 
HARRIS, S. E. Monetary Problems of the British Empire, 

Book VIII-IX, 1933. 

JAIN, L. C. Monetary Problems of India, 1934. 
JAIN, P. C. India Builds her War Economy, 1943. 
NEMENYI, L. War and Prices, 1943. 
RAO, V. K. R. V. 

War and Indian Economy, 1943. 

India and International Currency Plans, 1944. 
SHAH K. T. How India pays for the War, 1943, 

Post-War Depression and the way out, 1944. 

Sterling Assets of the Reserve Bank, 1946. 
SINHA, S. C. Indian Currency during the last decade 

(1926-36;, 1937. 
SOUNI : Post-war Inflation in India a survev. 


VAKIL, C. N . 

The Falling Rupee, 1943. 

Financial Burden of the War on India, 1943. 
VAKIL AND MTOANJAN Currency and prices in India, 1927 

Control, 1943. 

Price Control in India, 1946. 

C. Government Reports, Reserve Bank Publications, etc. 

Reports of the Herschell Committee; the Fowler Commit- 
tee, the Chamberlain Commission, the Babington Smith 
Committee and Hilton Young Commission. 

Reports ot the Controller of Currency, 1931-32 to 1934-35. 

Reports on Currency and Finance of the Reserve Bank of 

India. 1935-37 to 1947-48. 

Monthly Statistical Summery of the Reserve Bank- 

Annual Review of the Trade of India, 1942-43 and previous 


Monthly Survey of Business Conditions in India. 

Report of the Central Board of Directors of the Reserve 

Bank of India from 1937 to 1946- 

League of Nations : - 

Monthly Bulletin of Statistics. 
Money and Banking (annual). 
World Economic Survey (annual). 
Transition from War to Peace Economy, 1943. 
Commercial policy in the inter-war period, 1943. 
Economic stability in the Post- War World, 1944- 
International Currency Experience, 1944. 
Statistical Abstract for British India, 1927-28 to 1939-40. 
Report of the Foodgrains Policy Committee, 1943. 

D. Journals 
The Economic Journal. 
The Economica. 
The Economist. 


The Banker. 

The American Economic Review. 

The Federal Reserve Bulletin- 

The Indian Journal of Economics. 

The Eastern Economist. 

The Capital. 

The Commerce. 

The Indian Finance. 

The Journal of the Indian Merchants' Chamber. 

The Journal of the Indian Institute of Bankers. 
India Quarterly. 


Adarkar, B. P. 83n. 

Agriculturist 1 Inflation and, 156-60 

American Plan: 206-08 210-16,216-19, 


Anatol Murad; 15n. 
Ai%glo-American Agreement: 297-303 

Eabington Smith Committee: Recom- 
mendations, 40-43; on exchange 
rate, 40 ; minority report. 41 ; 

Birla. G. D 137n, 161, 257n. 

Blackett. Sir Basil : 57n, 71 n. 

Borrowing 145-49, 165-68. 

Bretton Woods: 219-26-and India ; 

Brij Narain : 294n. 

British Plan : 213-14 218-25, 227. 

Burke. Edmund : 233 

Canadian Plan: 213n 216-18, 218-25, 

Cassel, Gustav : 8n, 

Chamberlain Commission : on gold 
in circulation, 35 : on Gold 
Standard Reserve, 35 ; "on paper 
currency system, 35. 

Chetty, Sir R. K. S. 253n. 

Council Bills: 31-34, 42. 

Consumers subsidies : 282-83. 

Coyajee, J. C: 109n. 

Currency: volume 126.241 circulation of 
125-29; velocity of circulation of 
129-30 ; prices and- circulation, 
130-31, 185, 198-201; public 
confidence and , 186-90 ; three 
post-war plans, 204-17; automatism 
in, 278-83 ; elasticity in, 281-83. 
(See also War;. 

Dalai, D.M. : minority report, 41, 103. 
Darling, M. L : 80n 
Dearne<:s allowance : 170, 291-96. 
Decimal system : 270-73. 
Defence Loans : 145-48. 
Deilaticn . 10,12-16. 
Depreciation : 10, 
Desmukh. Sir C. D. : 94, 15Cn. 153n, 


Devaluation : 9, 10 Postscript 276-78 
Dollar crij is 237. 264. 
Dollar Pool 233, 260-62. 

Economic controls: Inflaticn and, 

Empire Dcllar Pool : 233 

Exchange : Rate of between coun- 
tries both on gold or silver stan- 
dard. 2-5; between countries on- 
different metallic standard, 5-6 
between countries, one or both 
having inconvertible paper curren- 
cy, 6-8; mint par of, 2, 5, 9 
(See also Rate of Exchance and 
Ratio Controversy). 

Exchange control; 11-12 119-24, 
222, 229. 

Ferrer,!. H. : 24n. 

Foodgrains Policy Committee : 168, 

Fowler Ccmmittee : 25-26. 

Gavin Jcnes, T. : 72n. 

Gayer. A D. : 105n. 

Ghose, B C. : 154n. 

Gold : gold standard 2; 53-57, 200-4 
gold bullion standard, 57-i 9, gold 
exchange standard : essentials of, 
30-31 ; evolution of, 27-29; mecha- 
nism of, 30 34; break down of, 36 
38; a critique of. 51-53. 


Gold exports: 78-85, 97, 98 

Gold points : 4-5 

Gold reserve : 27-29 

Gold sales ; 169. 

Gold standard : meaning 2: pros and 
cons 53-57, working of 200-14 
during inter war period 207-12; 
International Monetary Fund and 
-; 230-31. 

Gold Standard Reserve : 28-29; cons- 
titution, 29, functions, 33: Cham- 
berhin Cornmissicn on, 35; Babing- 
ton Smith Committee on 42-43; 
Hilton Young Commission on, 
47-51 ; Taken over by Reserve 
Bank 89. 

Gregory, Sir T. E. : 155n, 

Grigg, Sir P, James : 101n, 

Hailey, Sir W. M. : 46n. 

Hardy, CO.: 170n. 

Herschell Committee : 23-24* 

Hilton Young Committee: recommen- 
dations, 48-49 ; action on recom- 
mendations, 65-66, 

Imperial Bank of India : 54, 59, 60. 

Income-tax : 142-44. 

Indian economists, Manifestos of : 

International Bank: 224-31. 

International Monetary Fund 220422- 


Inflation : definition, 12-16. character 
and development, 130-39, 150-52 
velocity of currency circulation 
and, 154; agriculturist and, 156-60; 
social justice and, 154-56 ; pro- 
gress of thought about, 160-62; 
sterling balances and, 152-54 ; 
measures to combat, 163-72, 198 
200 dear ness allowance 291 -96 and 
Post war 240-9* 

Jain, L C. : 26n. 

Keynes, J. M. : 38, 52n, 155, 205, 213, 

Kunzru 244. 

Lease- Lend Aid ; f49-50 
Lindsay, A M. : 25, 39. 
Loans : (See Borrowing and Defence 

Madan, B. K. : 166n. 

Mansfield Commission : 20-21 

Marco, A. de Viti de 15n, 

Marshall Aid 234, 236. 

Meek, Sir David : 134n- 

Mehta, SirC B. : 169n. 

MehtaJ. M. : 196n. 

Mints, closure of, 23. 

Mint Par 2; 

Mises, L. Von : 13n. 

Monetary stability and Economic 

system 197-226 

Niemeyer, Sir Otto : 102. 
Niemeyer Award : 102, 145. 
Normal rate : 
of exchange 10-1 1. 

Overvaluation; 10 

Paper Currency 21n ; Chamberlain 
Commission on, 35; during war, 
38-39 ; Babington Smith Com- 
mittee on, 42-43; Hilton Young 
Commission on, 49, 52, 58. 

Paper Currency Reserve : 28n, 33n; 
35, 39n, 43, 45, 47-48, 52, 58. 89. 

Par Value of the Rupee ; 263-64 
(see also Rate of Exchange), 

Parkar and Wills : 15n. 

PigonA.C : 13n, 15n,296 

Pitman Act: 37. 

Plans : poft-war currency 204-17 

Prices; during 1931-39, 94-96: currency 
circulation and 130-31 ; price 
movements 169-71. 

Pr decontrol: 172-77, 


Price stability : Future of currency 

and ; 266-68 
Probin. Lesely : 25. 
Purchasing Power Parity : 6-8. 
Purshotamdas Thakurdas, Sir : minute 

of dissent, 49, 60,63-65, 70 

Railway contribution : 145. 

Raisman Sir J. : 169n, 196n. 228, 
258, 293, 294. 

Rajindra Prashad 245 

Rao, V. K. R. V, : 185n. 

Rate of exchange : from 1874 to 
1893, 22-23 ; Fowler Committee 
on 26; durinq war, 38-39; Babing- 
ton Smith Committee on. 40-42 
after war, 43-45; Hilton Young 
Commission on, 49, 61-65; minute 
of dissent on, 47, 61-65; from 1927 
to 1931, 67-69; from 1931 to 1939; 
74-78, 99-101; Indian National 
Congress on, 111-13: during the 
second World War, 117-19; in 
relation to future of Indian 
currency : 263-64. 

Ratio controversy : 61-65, 69-73, 
102-15, 263-64. 

Reflation : 17. 

Repatriation of sterling : 190-96 
(See also Sterling ) 

Reverse Councils : 32-34 35, 43, 45, 

Reserve Bank of India : 59, 61. 87-94 
119, 125, 190, 121, 193- 194, 195 

Robbins, L : 201 n, 
Ropke, W, ; 202n. 
Rowlands, Sir A; 239. 
Rudra, S. K. ; 186n. 

sales of, 85-86: silver standard 

Sinh*. J.C. and H. 69n. 

Small coin : 128, 188-190,273. 

Stepanov.M. S. : 220 

Sterling : purchase of, 47, 118; link- 
ing of the rupee to, 74 48. 168; 
repatriation of. 190-96; disposal 
of balances, 190-96; post-war 
plans and balances, 201. 253, 284, 
302; and future of Indian cur- 
rency, 258-59. 

Sterling exchange standard : 18, 66 

Stolper, Gustav : I6n. 

Taxation 142-44 165. 
Taylor, Sir J. B. 94. 
Thomas, P. J. : 162n, 
Trevelyan, Sir Charles ; 21. 

Undervaluation : 10 

United Nations; MonetarV Conference, 

205, 219-20. 
U. N. R. R. A 216 

Vakil. C. N. 148n, 160, 167n, 
Velocity of currency circulation: 125* 

Saving; 148. 166n. 

Schuster. Sir George : 73n 75n, 76n, 


Shenoy, B. R. ; 59n. 
Shroff, A-D 259n 
Silver : price of 7, 21 ; conservation 

during the war of , 38-39 ; 

War : effects on currency system of 
36-38 ; regulation of currency 
during 38-39, currency develop- 
ments after... 43-48; on the eve of 
second world,.., 116; currency 
circulation during second world... 
124-31; aftermath of..., 234-48. 

War finance: magnitude and methods, 

Welby. R. E. ; 24n. 

White. H. 206n 

Wicksell, Knut . 5n.